D.C. tax decoupling from federal law refers to the specific federal tax provisions the District of Columbia has rejected, even though its tax code otherwise conforms to the Internal Revenue Code automatically. The practical effect for you: deductions, exclusions, and preferential rates that lower your federal bill may do nothing on your D.C. return, and some must be added back as taxable income. The biggest divergences sit in estate tax, business depreciation, the qualified business income deduction, capital gains treatment, and out-of-state municipal bond interest. One decoupling runs the other way and helps you: the District ignores the federal SALT cap.
Why the District Breaks From Federal Rules at All
D.C. conforms to the Internal Revenue Code on a rolling basis. Every change Congress makes to federal tax law takes effect locally the moment it takes effect federally, without any vote from the D.C. Council. The Council only acts when it wants to reject a federal change, usually through the annual Budget Support Act or 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 in a single piece of legislation. Bonus depreciation, the qualified business income deduction, the SALT cap, and research and experimental expenditure rules all got frozen or overridden at once. Knowing which provisions have been rejected is the only way to file an accurate District return.
Estate Tax: A Much Lower Exemption
The widest gap between federal and District tax law is in estate taxation. For 2026, the federal estate tax exemption is $15 million. The District’s exemption is $4,988,400, roughly one-third of the federal threshold. An estate worth $7 million owes nothing federally but faces a significant District bill.
District rates are graduated, starting at 0% within the exemption and climbing to a top rate of 16% on amounts above it. The exemption adjusts annually for inflation under D.C. Code § 47-3701, which pegs the base amount at $5.6 million with a cost-of-living adjustment each year starting in 2019. The District deliberately 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 so sharply. That freeze is what preserves the lower local threshold.
No Portability for Surviving Spouses
Federal law lets a surviving spouse inherit the deceased spouse’s unused exemption, giving a couple a combined shelter of roughly $30 million for 2026. The District does not recognize portability. When the first spouse dies, any District exemption that estate didn’t use is gone. Couples who want to preserve both exemptions have to plan before the first death, typically with trust structures that fund up to the District exemption amount. Missing this point can cost a surviving spouse’s estate hundreds of thousands of dollars in local tax.
Depreciation and Expensing Rules for Businesses
Business owners feel D.C. decoupling most in how they recover the cost of assets. The District rejects two of the biggest federal cost-recovery incentives and caps a third at a fraction of the federal amount.
Bonus depreciation. Federal law allows 20% first-year bonus depreciation 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 in full on your D.C. franchise or income tax return.
Section 179 expensing. The federal Section 179 limit for 2025 was $1,220,000, with 2026 expected to be higher. The District caps Section 179 at $25,000. Deduct $500,000 of equipment federally, and only $25,000 of that carries over to your D.C. return.
Research and experimental expenditures. The District requires these costs to be capitalized and amortized over five years, matching the post-2021 federal treatment under IRC § 174A. But the District does not allow the federal election to amend a prior return for R&E treatment changes.
A business can show a large loss federally and a taxable profit in the District because of these adjustments alone. The D-20 and D-30 instructions are explicit: do not claim federal bonus depreciation, and reduce Section 179 to $25,000. Capital gains and losses must also be recalculated without the disallowed bonus depreciation, because the asset’s District basis is different. Keeping parallel depreciation records for federal and D.C. purposes is unavoidable.
Qualified Business Income Deduction: Disallowed
The federal QBI deduction under IRC § 199A lets owners of S corporations, partnerships, and sole proprietorships deduct up to 20% of qualified business income. The District disallows it entirely. Whatever QBI deduction you claimed federally gets added back when you compute District taxable income. For a profitable pass-through owner, this one adjustment can mean thousands in additional local tax.
Individual Income Items That Diverge
Several places in the individual code either add income the federal government excludes or strip away a federal preference.
Out-of-State Municipal Bond Interest
Interest on state and local government bonds is generally federally tax-exempt. 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 municipal bonds from any other state or locality must be included in District gross income. For tax years beginning after December 31, 2024, D.C. Code § 47-1803.02 makes this mandatory for individuals, estates, and trusts. If you hold a diversified muni fund, the portion of interest from non-D.C. issuers is added back.
Capital Gains Taxed as Ordinary Income
Long-term federal capital gains top out at 20% (plus the 3.8% net investment income tax). The District has no preferential capital gains rate. Long-term gains on stock or real estate sales can be taxed locally at up to 10.75%. Separately, the District requires you to include any gain you excluded federally under IRC § 1202, the small business stock exclusion. A founder who sold qualified small business stock tax-free federally still owes District tax on the gain.
Charitable Deduction for Non-Itemizers, and Tips
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 on the District return. The District also disallows any federal deduction for “qualified tips” under IRC § 224.
Subtractions That Help
Not everything runs against you. District residents can exclude interest and dividends from U.S. Treasury obligations, and may subtract D.C. College Savings Plan contributions up to $4,000 per account owner, or $8,000 for joint filers where each spouse owns an account.
The SALT Cap: Decoupling That Helps You
The federal SALT deduction is capped at $10,000. The District ignores that cap. Under the 2025 emergency legislation, the SALT deduction is allowed “without regard to the applicable limitation amounts” in IRC § 164(b)(6). If you itemize on your D.C. return, you deduct the full amount of state and local taxes you paid. This matters most for higher-income homeowners whose property taxes alone exceed the federal cap.
How to Reconcile the Two Returns
Schedule I is the bridge between your federal Form 1040 and your D.C. Form D-40. It runs two calculations: additions to federal adjusted gross income and subtractions from it. Additions capture items the District taxes but the federal government doesn’t, including out-of-state bond interest, the full amount of federal bonus depreciation you claimed, and any Section 179 expense above $25,000. Subtractions capture items the District excludes, such as U.S. Treasury interest, the excess of D.C.-allowable depreciation over federal depreciation in later years (which gradually reverses the earlier addback), and D.C. College Savings contributions.
Business filers do a parallel reconciliation on the D-20 or D-30. The D-20 instructions require an attached computation showing your D.C. depreciation excludes federal bonus depreciation and that depreciable basis has not been reduced by the disallowed amount. Capital gains and losses must be recomputed on the D.C. basis, which can flip a gain to a loss or vice versa on a given asset sale. None of this is optional. The Office of Tax and Revenue matches federal and local data and issues deficiency notices when the numbers don’t reconcile.
What Underpayments Cost You
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 whether or not you filed an extension. To avoid underpayment interest on estimated tax, your withholdings and estimated payments have to cover at least 90% of your 2026 District income tax or 110% of your 2025 District liability for a full 12-month period. If a significant federal-to-D.C. adjustment hit in a prior year and you didn’t increase your estimated payments to match, the compounding interest builds quickly.