Washington is among 13 states invited to take part in a pilot program by the Internal Revenue Service for a free tax filing program next year.
The Direct File program will give taxpayers the option to electronically file their federal tax returns directly with the IRS at no cost.
“This is a critical step forward for this innovative effort that will test the feasibility of providing taxpayers a new option to file their returns for free directly with the IRS,” said IRS Commissioner Danny Werfel in a Tuesday news release.
One of the reasons the Evergreen State was chosen for the program is due to its lack of a state income tax, according to the IRS. Eight other states without an income tax – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas and Wyoming – are also eligible to participate in the Direct File program.
While Washington does not have a state income tax, it now has a capital gains tax.
In 2021, the state Legislature passed a capital gains tax and Gov. Jay Inslee signed it into law. It creates a 7% tax on profits of more than $250,000 from the sale of some assets, such as stocks and bonds.
In March, the state Supreme Court upheld the constitutionality of the tax.
Washington has avoided an income tax since passing an amendment in 1930 to Article VII of the state constitution that prohibits graduated income taxes on “property,” which is broadly defined to include money.
Even before Washington’s highest court validated the capital gains tax earlier this year, at least one state lawmaker made it known he hoped to use such a decision as a means of allowing the Legislature to pass a broad-based, graduated income tax.
“The next step was to do the capital gains tax, which is important – I mean, it’s not an insignificant amount of money – but the importance, in my opinion, is less about the dollars that it’s raising and more about the fact that the opponents are attacking it as an income tax, and that gives us a clean shot to go back to the Supreme Court and go back to the root of this entire problem,” Sen. Jamie Pedersen, D-Seattle, said at a March 15, 2022 virtual meeting.
He went on to say, “We’ve got to figure out how to have an income tax in our state, in getting the state Supreme Court to say, ‘You are free Legislature to do an income tax, or a capital gains tax, or wealth tax,' you know, any of these things, with a simple majority, is what we’ve been working on.”
The state's Working Families Tax Credit – individuals and families receive up to $1,200 back if they meet certain eligibility requirements – is also mentioned in the IRS news release.
“Washington has also chosen to join the integration effort for the state's application of the Working Families Tax Credit,” the news release reads.
The other four states taking part in the Direct File program are Arizona, California, Massachusetts and New York.
The Inflation Reduction Act passed last year by Congress and signed into law by President Joe Biden provides $15 million to the IRS to determine how to create a system allowing Americans to file their taxes for free.
“We have more work in front of us on this project,” Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure it's user-friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season.”