Washington’s Proposed Millionaires’ Tax: Understanding Safe Harbor and Future Payments

Washington state is considering a new tax targeting households that earn $1 million or more. As of October 7, 2026, lawmakers and an advisory group are still working out the details. A key issue being discussed is how to handle taxpayers who might unexpectedly owe this tax, especially if they didn’t owe any Washington income tax in the previous year. This concern, raised by CPA Bea Nahon, highlights a potential gap in the proposal regarding “safe harbor” protections.

The Safe Harbor Dilemma for High Earners

Safe harbor rules in tax law typically protect taxpayers from penalties if they have paid a certain percentage of their tax liability throughout the year. These rules often allow taxpayers to base their payments on either the current year’s expected tax bill or the previous year’s tax bill. However, for individuals or households who had no Washington income tax liability in the prior year, there is no state tax figure to use as a benchmark. This means they could face penalties even if they pay their full tax bill by the filing deadline.

Unexpected Income Events and Tax Liability

A situation where this lack of a prior-year benchmark becomes problematic is when a taxpayer experiences a significant, one-time income event. For example, someone might not have owed Washington income tax one year, but the next year they receive a large bonus, sell a business, or make a substantial stock transaction. These events could push their household earnings over the $1 million threshold, making them liable for the new tax. Even if they pay the tax when they file their return, they could still be subject to penalties for not making estimated tax payments throughout the year. This is because the timing of payments, not just the final amount paid, can trigger penalties.

Non-Residents and Unexpected Tax Obligations

The proposed tax could also affect individuals who do not reside in Washington but earn income within the state that falls under the tax’s scope. These non-residents could also find themselves unexpectedly liable for the tax. It is important for anyone anticipating a large income event, whether a resident or non-resident, to understand that paying the full tax bill by the filing deadline might not be enough to avoid penalties. The law or future guidance will need to provide clarity on how these situations will be handled.

Lawmakers’ Timeline for Resolution

Representative Noel Frame, a Democrat from Seattle, has acknowledged that lawmakers are looking into how the tax will initially be put into practice, including the issue of taxpayers who owe nothing in the prior year. The first payments for this tax are not due until April 2029. This gives lawmakers time to establish a baseline for prior-year tax obligations. They are considering lessons learned from the implementation of Washington’s capital gains tax.

Potential Impact of a First-Year Exemption

One idea being discussed is a first-year exemption from estimated payments. However, this could create a different set of challenges. Representative Frame noted that if taxpayers are exempt from making estimated payments in the first year, they might be required to pay 90% or even 100% of their estimated liability in advance the following year. Some taxpayers might later discover they do not qualify for the tax, leading them to wait for a refund, which could cause cash flow issues. The state is working to balance these potential outcomes to create a fair system.

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