How to enter paid Washington state capital gains tax

[mattmi88]

In Washington, I paid a tax in 2024 on the income from capital gains I earned in 2023. I exceeded the limit for the year (for 2023 it was $250,000) and I paid a 7% tax on the amount over the limit.

In TurboTax, I tried to enter the tax amount under "Other income taxes", "Other Income Taxes Paid in 2024", "Balance due on your 2023 state taxes pad in 2024". However, the drop-down menu for the state doesn't list Washington, so I can't complete the entry.

So, how do I enter this value, or am I even allowed?

Thanks!

[mattmi88]

Since I couldn't use the Step-by-Step entry method, I went to the forms to enter this information. Working backwards from Schedule A, I found what I think is the right place to enter this state tax amount, which in Washington is a 7% tax on the long term capital gains from the sale of stocks, bonds or other similar assets (home sale gains are explicitly excluded).

I entered the amount on the "Tax Payments" worksheet, line 24 "Other (amended returns, installment payments, etc.)" under the "Prior Year Taxes Paid In 2024" section. I put the value in the State column and WA in the ID column. I also added a supporting details note describing the tax and the date I paid it.

The value appeared to flow correctly into the appropriate forms: "Schedule A Line 5 State and Local Tax Deduction Worksheet", Tax & Int Wks (titled "Schedule A Lines 5-12 Tax and Interest Deduction Worksheet"), and Schedule A, line 5a.

Sadly, even though this was a sizeable amount, other state and local taxes added to it exceeded the $10,000 limit for the deduction, so this was all moot (e.g., the home property tax exceeded the limit all by itself). Nonetheless, it would be good for Intuit to update the Step-by-Step entry forms to support this new Washington state tax, which is based on income from capital gains, even though the state does not have a formal income tax like many other states.

Finally, I would appreciate an expert in this forum community to comment and hopefully confirm my entry method.

Thanks very much!

[DawnC · Accepted solution]

The Washington capital gains tax is considered an excise tax and therefore is not deductible on your federal return.   The excise tax cannot be deducted from federal ordinary income because the levy does not fit within any of the types of state or local taxes.   

[edited 02/05/25 | 11:44 PST] 

When requesting WA be added, it was determined that the tax is not deductible on your federal return.   @mattmi88 

[mattmi88]

@DawnC- Thanks very much for the quick response!

[mattmi88]

@DawnC- Again, thanks very much!

I completely forgot about that. I remember now that the state supreme court agreed with the state that it was an excise tax and not an income tax, which allowed them to go through with it and get around the constitutional prohibition of an income tax.

Thanks for following up on this! Hopefully, other WA TurboTax users can find this thread and avoid the confusion.

Cheers

Matt

[alleychow]

According to Andersen LLC, the Washington state capital gains excise tax may be used to offset federal capital gains.

https://andersen.com/uploads/white-papers/Federal_Tax_Implications_of_Washington_State’s_New_Capital_Gains_Excise_Tax_-_No_Contact.pdf

Does anyone else have an opinion on the legality of this opinion?

Edit: to use the link, make sure you highlight the WHOLE link (not just the blue highlighted part)

[DaveF1006]

Yes, the excise tax is constitutional and legal in the state of Washington.  The problem is that it is not deductible on the federal return nor does it reduce capital gains. Anderson may allude to the fact where it does reduce capital gains but this is not embedded in the IRS Tax code.