Emergency Tax Bill Ends $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.
Here’s how state tax conformity rules could immediately raise your income tax liability.
Amid a record-breaking federal government shutdown, Washington, D.C. leaders made an emergency move that impacts key tax breaks for residents.
The D.C. City Council decoupled from the new 2025 Trump tax law, thereby removing local income tax savings tied to the new "no tax on tips" deduction and the $6,000 "senior bonus" deduction. This means District of Columbia residents who qualify for these federal tax breaks won't be able to claim them on their local tax returns.
While difficult, the choice certainly wasn’t surprising. The District of Columbia is expected to lose up to $1 billion in revenue over the next four years, due to the projected loss of 40,000 federal government-related jobs, according to the D.C. Fiscal Policy Institute (DCFPI). Although the federal shutdown may be coming to an end, its effects could be felt long-term in the nation’s capital.
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City Chief Financial Officer Glen Lee wrote in a letter to the mayor and council chairman late September, citing that a prolonged government shutdown could “place significant strain on the economy” in D.C., as previous shutdowns had “a range of impacts on revenue.”
The Council’s temporary decision to separate its income tax laws from federal tax provisions also underscores a broader, continuing state-level debate: Should states adopt all of the “Trump tax law,” and if not, which provisions will get bumped? Read on.
D.C. ends tax-free overtime and bonus deduction for older adults
Although the BBB is federal law, it doesn’t have to be part of state tax laws. That’s because states have three options when it comes to adopting current federal tax policy (or any combination thereof):
- Rolling conformity. States can automatically follow the latest federal rules for the current tax year.
- Static conformity. States can update their conformity date every year through legislation.
- Selective conformity. States can “pick and choose” which parts of the federal tax law to follow, rather than adopting the tax code in its entirety.
In the past, the District of Columbia has typically accepted federal tax law on a rolling basis. However, just this month, the City Council approved “emergency legislation” to decouple from federal tax code changes enacted in July, including:
- The $6,000 bonus deduction for older adults.
- The “no tax on tips” provision and the overtime pay deduction.
- Immediate expensing of research and development (R&D) costs.
- Special depreciation allowances for businesses.
By excluding these provisions from D.C. income taxes, the Council is hoping to save $95 million in fiscal year 2025 and $567 million through fiscal year 2029.
Retained revenue will be used to create a new local Child Tax Credit of $1,000 per child and expand the city’s Earned Income Tax Credit from 85% to 100% of the federal level.
Supporters of the measure, like the DCFPI and DC Guaranteed Income Coalition pointed out the growing child poverty rates in the District of Columbia. The city faces a significant challenge with child hunger, affecting approximately one in seven children. Furthermore, D.C.'s child poverty rate for those aged 6 to 17 is the fifth-highest when compared to other states, according to the DCFPI.
Federal vs. state: The complex rules of tax conformity
The “emergency amendment” that the City Council passed did not require voter approval. The effect will only last 90 days, at which point a “temporary amendment” clause will also kick in, extending the law for 225 days. After that, the law must be approved through the normal, permanent state legislative process.
Yet while D.C. is unique in how it temporarily decoupled from federal law, other former rolling conformity states are decoupling from individual tax law via more “traditional” methods:
- New York has rejected the federal "no tax on tips" and overtime deductions. The state achieved this by adhering to its tax code's static date (an enactment date before the new bill was signed), effectively ensuring these federal tax breaks do not apply to state income taxes.
- Even before the BBB was signed, Colorado passed a law requiring all overtime pay to remain subject to overtime tax. This means the overtime provision in the BBB will not benefit Colorado overtime workers on their state returns.
With COVID-era federal aid depleted and Trump tariffs raising economic uncertainty, many states are looking for ways to protect state budgets by decoupling from federal corporate tax law, too.
For instance, Michigan, Rhode Island, and Illinois decoupled from specific business tax cuts, like the 100% bonus depreciation and R&D provisions. If all states conformed with these provisions, the total projected cost would be $38.2 billion in 2026, according to the Tax Foundation.
However, in an already slowing national economy, further reduction in economic growth could be a red flag. The Tax Foundation has advocated for “judicious decoupling” of federal tax cuts that could promote economic prosperity, particularly in the nation’s capital.
The Institute of Taxation and Economic Policy also reports that greater conformity to federal rules makes state tax returns more “practical” for taxpayers, with “fewer calculations to make.”
How state tax conformity will alter your 2025 income tax bill
As the debate continues, several states have decided to either decouple from federal provisions or simply continue with existing state tax laws. Here’s a breakdown of where various states stand in adopting BBB tax provisions, according to Reuters:
- At least four states will accept most BBB individual return provisions in 2025, including Iowa, Montana, North Dakota, and Oregon.
- Several states will not conform to BBB provisions, including California, Connecticut, Hawaii, and Massachusetts.
- Waiting in the wings are states like Georgia, Maryland, and South Carolina, which plan to address changes to their state tax codes in the 2026 legislative session.
So when you file your 2025 taxes in the 2026 filing season, you should pay extra attention to your state return. The tax breaks you thought you were getting may only apply to your federal taxes, and your state tax liability may be unaffected by the new Trump tax law provisions.
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