D.C. tax decoupling from federal law refers to the deliberate breaks the D.C. Council has written into an otherwise automatic conformity system: the District follows the Internal Revenue Code on a rolling basis, but the Council has rejected a growing list of federal provisions that would either cost local revenue or clash with District priorities. The result for filers is that a deduction, exclusion, or preferential rate that lowers your federal bill may do nothing on your D.C. return, and in several cases the excluded amount has to be added back as taxable District income.
How Rolling Conformity Actually Works
Every amendment Congress makes to the federal tax code becomes District law the moment it takes effect federally. The Council does not vote to adopt each change. It votes only when it wants to reject one, typically through the annual Budget Support Act or, when federal changes land mid-year, through standalone emergency legislation.
The most sweeping recent example is the D.C. Income and Franchise Tax Conformity and Revision Emergency Amendment Act of 2025, which decoupled from more than half a dozen federal provisions at once. That law froze or overrode District treatment of bonus depreciation, the qualified business income deduction, the SALT deduction cap, research and experimental expenditure rules, and several other items. Filing accurately means knowing which federal numbers to carry over and which to override.
Estate Tax: A Far Lower Exemption and No Portability
The widest gap sits in estate taxation. For 2026, the federal estate tax exemption is $15 million. The District’s exemption is $4,988,400, roughly one-third the federal threshold. An estate worth $7 million owes nothing to the IRS but faces a significant District tax bill.
The District’s rates are graduated, starting at 0% within the exemption and climbing to a top rate of 16%. The exemption adjusts annually for inflation under D.C. Code § 47-3701, which pegs the base amount at $5.6 million and applies a cost-of-living adjustment each year beginning in 2019. The District froze its estate tax conformity to the IRC as it existed on January 1, 2001, well before the Tax Cuts and Jobs Act of 2017 raised the federal exemption. That freeze preserves the lower local threshold.
Portability is another break point. Federal law lets a surviving spouse inherit any unused portion of the deceased spouse’s exemption, effectively doubling the couple’s combined shelter to $30 million for 2026. The District does not recognize portability. When the first spouse dies, any unused District exemption is gone. Couples who want to preserve both District exemptions generally need trust planning funded up to the District exemption before the first death. Skipping that step can cost the surviving spouse’s estate hundreds of thousands of dollars in local tax.
The District also requires its own return, Form D-76, filed and paid electronically through MyTax.DC.gov within 10 months of the date of death. A six-month filing extension is available on Form D-77, but it does not extend the payment deadline; interest runs from the 10-month mark.
Bonus Depreciation, Section 179, and R&E Costs
Business owners feel decoupling most in cost recovery. The District rejects two major federal incentives outright and caps a third far below the federal limit.
- Bonus depreciation. Federal law allows a 20% first-year bonus depreciation deduction for 2026 (phasing down from 100% in 2022 under the TCJA schedule). The District allows zero. Any bonus depreciation claimed federally must be backed out entirely on your D.C. franchise or income tax return.
- Section 179 expensing. The federal Section 179 deduction for 2025 was $1,220,000, and the 2026 limit is expected to be higher. The District caps Section 179 at $25,000. Deduct $500,000 of equipment federally and only $25,000 flows through to your D.C. return.
- Research and experimental expenditures. The District requires these costs to be capitalized and amortized over five years, matching post-2021 federal treatment under IRC § 174A. Unlike the federal rules, the District does not allow the election to amend a prior return for R&E treatment changes.
A business can therefore show a large loss federally while reporting a taxable profit in the District. The D-20 (corporation franchise tax) and D-30 (unincorporated business franchise tax) instructions are explicit: strip out federal bonus depreciation and reduce Section 179 to $25,000. Capital gains and losses have to be recalculated without the disallowed bonus depreciation, because the asset’s basis for D.C. purposes is different. Parallel depreciation records for federal and District filings are unavoidable.
Qualified Business Income Deduction: Disallowed
The federal qualified business income deduction under IRC § 199A lets owners of pass-through businesses deduct up to 20% of their qualified business income. The District disallows this deduction entirely. Any QBI amount claimed federally must be added back when computing District taxable income. For a profitable pass-through owner, that single addback can mean thousands of dollars in extra local tax.
Individual Income Items That Diverge
The District’s income tax rates run from 4% on the first $10,000 of taxable income to 10.75% on income above $1 million, so the following adjustments land at real marginal rates.
Out-of-State Municipal Bond Interest
Interest on state and local government bonds is generally exempt from federal tax. The District honors that exemption only for its own bonds and for bonds issued by D.C. Water, WMATA, and the D.C. Housing Finance Agency. Interest on any other state or local municipal bond must be included in D.C. gross income. For tax years beginning after December 31, 2024, D.C. Code § 47-1803.02 makes this inclusion mandatory for individuals, estates, and trusts. If you hold a diversified municipal bond fund, the portion of interest tied to non-D.C. issuers gets added back locally.
Capital Gains Taxed as Ordinary Income
Federal law taxes long-term capital gains at preferential rates topping out at 20% (plus the 3.8% net investment income tax). The District offers no preferential rate. All capital gains are taxed as ordinary income, so long-term gains on stock sales or real estate can be taxed at up to 10.75% locally. Separately, the District requires you to include in gross income any gain excluded federally under IRC § 1202, the qualified small business stock exclusion. A founder who excluded the entire gain on a QSBS sale federally still owes District tax on that amount.
SALT Cap: A Decoupling in Your Favor
Not every break cuts against the taxpayer. The federal SALT cap limits the deduction for state and local taxes to $10,000. The District ignores this cap when computing District taxable income. Under the 2025 emergency legislation, the SALT deduction is allowed “without regard to the applicable limitation amounts” in IRC § 164(b)(6). Itemize on your District return and you deduct the full amount paid, not just the first $10,000. Higher-income homeowners whose property taxes alone exceed the federal cap benefit most.
Other Individual Adjustments
A few smaller items catch filers by surprise. For tax years beginning after 2024, non-itemizers who claimed the federal above-the-line charitable deduction under IRC § 170(p) must add that amount back to District gross income. The District also disallows the federal deduction for “qualified tips” under IRC § 224. On the subtraction side, D.C. residents can exclude interest and dividends from U.S. Treasury obligations, and can subtract D.C. College Savings Plan contributions up to $4,000 per account owner ($8,000 for joint filers where each spouse owns an account).
Bridging the Two Returns
Schedule I of Form D-40 is where the reconciliation happens for individuals. It runs two calculations: additions to federal adjusted gross income and subtractions from it. The additions capture items D.C. taxes but the IRS doesn’t, including out-of-state bond interest, the full federal bonus depreciation you claimed, and any Section 179 expense above $25,000. The subtractions capture items D.C. excludes, including U.S. Treasury interest, the excess of D.C.-allowable depreciation over federal depreciation in later years (which gradually reverses earlier addbacks), and D.C. College Savings contributions.
Business filers do the same work on the D-20 or D-30. The D-20 instructions require an attached computation showing that your D.C. depreciation excludes federal bonus depreciation and that the depreciable basis has not been reduced by the disallowed amount. Capital gains and losses have to be recalculated on the D.C. basis, which can flip a reported gain into a loss or vice versa. These adjustments are not optional. The Office of Tax and Revenue matches federal and local data and issues deficiency notices when the numbers do not reconcile.
Interest and Underpayment Penalties
Getting these adjustments wrong is expensive. The District charges interest on underpaid tax at 10% per year, compounded daily, running from the original due date regardless of any extension. To avoid underpayment interest on estimated tax, your withholdings and estimated payments must equal at least 90% of your 2026 District income tax, or 110% of your 2025 District tax liability for a full 12-month period. A large federal-to-D.C. addback in a prior year without a matching bump in estimated payments compounds quickly.
The same 10% compounded daily rate applies to estate tax unpaid after the 10-month deadline. A filing extension does not extend payment. Personal representatives who wait for the federal estate process to conclude before turning to the District return can pick up months of avoidable interest.