Press Room: Tax Release

August 09, 2017

Seattle Approves Income Tax on High-Income Individuals and Trusts

On July 10, 2017, the City of Seattle (City) unanimously approved Council Bill 119002 to create an income tax on high-income individuals and trusts. The tax is estimated to generate $140 million per year for Seattle which will be put towards a number of stated objectives including lowering the property tax burden and impact of other regressive taxes; addressing the homelessness crisis; providing affordable housing, education, and transit; replacing federal funding potentially lost through federal budget cuts; creating green jobs and meeting carbon reduction goals; and administering and implementing the tax.

The income tax is intended to be effective as of January 1, 2018, with collection of taxes beginning April 15, 2019, and a finalized set of rules by November 15, 2018. It is unlikely that the target effective date will be met. The new income tax is expected to face significant legal challenges and there may also be potential implementation delays associated with establishing a system for collection and enforcement. As a result, revenues from the new income tax are not expected to be realized in 2018.

Taxpayers Affected

The income tax will be imposed on a resident’s total income in excess of $250,000 for the tax year for individuals or married filing separately taxpayers, or total income in excess of $500,000 for married filing jointly taxpayers.

The tax applies to resident individuals and trusts or portions of trusts that are not taxable to the grantor and consist of property transferred to an irrevocable trust by a Seattle resident, or a revocable trust by a trustor who was a Seattle resident at the time the trust or portion of trust became irrevocable. Thus, it’s not just individuals who will be subject to the tax, trusts will also need to be cognizant of potential income tax exposure and some former Seattle residents may be affected. Seattle residents that own pass-through entities may also be subject to the income tax on their share of pass-through income, even if income is not actually distributed or received.

The term resident applies to any natural person who has a domicile in the City of Seattle for the entire tax year; or maintains a permanent place of abode and spends in the aggregate more than 183 days or any part of the day of the tax year in the City. Therefore, individuals that maintain vacation homes or apartments within Seattle could also be subject to the new City income tax.

Tax Base and Tax Rate

Total income subject to the tax is the amount reported on line 22 of federal Form 1040, U.S. Individual Income Tax Return; line 15 of federal Form 1040A, U.S. Individual Income Tax Return; or line 9 of federal Form 1041, U.S. Income Tax Return for Estates and Trusts. The total income threshold subject to tax will be adjusted annually on the first of every year by the City of Seattle based on the average annual growth rate of the bi-monthly Consumer Price Index for the Seattle-Tacoma-Bremerton area. The tax rate applicable to income above the relevant threshold is 2.25%.

Filing Deadlines

The filing deadline for returns will be April 15 following the tax year. Taxpayers can request a six-month extension by filing a copy of federal Form 4868 with the City by April 15. The statute of limitations with respect to the tax will be three years from the later of when the tax was due or the return was filed.

Future of the Tax

While proponents believe the new City income tax will create a fairer tax structure for the City of Seattle, opponents contend the tax violates state law and is in contravention of the Washington State Constitution. There is also concern that the new income tax could hurt businesses based in Seattle by driving up wages and causing companies to move jobs elsewhere. It is likely the new income tax will face significant legal challenges which will make it very costly for the City to defend.