On July 10, 2017, the Seattle City Council passed CB 119002, which imposes a 2.25% income tax on Seattle residents who earn more than $250,000 or $500,000 if married filing jointly for tax periods beginning on or after January 1, 2018.
This tax is also imposed on certain trusts to which residents transfer property. A resident is defined as an individual who is or isn’t domiciled in the city and:
- Maintains a permanent place of abode in the city
- Spends more than 183 days in the city
The measure of the tax is the individual’s total income, defined as income on Line 22 of IRS Form 1040 or Line 15 of IRS Form 1040A.
For trusts subject to the income tax, the measure of tax is Line 9 of IRS Form 1041 or equivalent form published by the IRS that isn’t reported on Schedule K-1 for a beneficiary.
Applicable Filing Statuses
The 2.25% tax rate applies to total income over $250,000 for the following IRS filing statuses:
- Head of household
- Qualifying widow(er) with dependent child
- Married filing separately
For taxpayers whose IRS filing status is married filing jointly, the 2.25% rate applies to total income in excess of $500,000. If a married couple files a joint federal income tax return but one spouse is a resident of Seattle and the other isn’t, then special rules apply to separate the resident’s income to be subject to the city income tax. These income thresholds are annually indexed to inflation beginning in 2019.
For taxpayers who earn income outside of Seattle, the legislation provides a credit for income taxes paid to other state and local jurisdictions. Out-of-city income includes amounts from:
- Trade or business conducted outside the city
- Gains from the sale or exchange of real or tangible personal property located outside of Seattle
- Salaries or other compensation earned outside the city
- Intangible income if the individual is domiciled in Seattle for the entire tax year
Individuals and trusts that exceed the above income thresholds are required to file a Seattle income tax return and pay Seattle income tax on April 15 or the next business day if the 15th falls on a Saturday, Sunday, or federally recognized holiday.
The Seattle Department of Finance and Administrative Services, under the proposed ordinance, can extend the income tax return filing date by up to one year with a showing of good cause. In addition, taxpayers can obtain an automatic six-month extension by submitting a copy of the IRS Form 4868 before the original due date.
Interest and penalties aren’t assessed if the return is filed and tax paid by the extended due date. Currently, there are no provisions for the payment of estimated tax by the taxpayer or a requirement by employers or other parties to withhold Seattle income tax on amounts paid to residents.
The Seattle City Council estimates this income tax will generate $140 million per year from approximately 8,500 taxpayers. Opponents of the tax are expected to file legal challenges with respect to violation of various aspects of the Washington Constitution, Washington State law, and existing Seattle ordinances.
We’re Here to Help
To better understand how this tax might affect you or your business, please contact one of our state and local tax partners: