The Washington D.C. Council has enacted an emergency tax bill aimed at “decoupling” specific aspects of its tax framework from the recent federal tax modifications introduced through President Donald Trump’s One Big Beautiful Bill Act (OBBB). This critical move effectively prevents certain tax breaks for tips and overtime payments, which are significant for many in the hospitality sector.
This decision carries substantial implications for thousands of hospitality workers in the District, who traditionally rely on tips and overtime pay to enhance their earnings. As a result of this decoupling, these additional earnings will continue to be fully taxable under local law.
The City Council’s recent vote resulted in the rejection of 13 out of 84 updated tax provisions from the OBBB. Under the previously established federal law, workers in the hospitality and service industries had the opportunity to deduct up to $25,000 in tips and $12,500 in overtime pay for individual filers, with higher allowances for joint filers. By opting for decoupling, D.C. residents eligible for these deductions will not see these tax savings reflected in their local income tax statements.
In conjunction with these measures, the Council also decided to eliminate a $6,000 local senior bonus deduction and various other business-related tax exemptions. These actions are part of an emergency legislative strategy designed to stabilize the District’s financial outlook amid anticipated revenue shortfalls exceeding $1 billion over the next three years, as reported by the D.C. Fiscal Policy Institute. Factors contributing to this economic strain include the loss of around 40,000 federal jobs, sluggish economic growth, and rising social program costs. By dismissing the federal tax deductions applicable to tips, overtime, and other reliefs, the Council expects to save millions in lost revenue.
The D.C. Council has expressed that part of these savings will be directed towards vital local initiatives such as a new $1,000-per-child tax credit for qualifying families and a full local match of the Earned Income Tax Credit (EITC) to the federal level.
In an official statement, the D.C. Council stated: “At our most recent Legislative Meeting, the Council voted on an emergency basis to decouple elements of the District’s tax code from the federal, following Congress’ passage of the so-called One Big Beautiful Bill Act (OBBBA). Taking into account updated revenue forecasts from the District’s Chief Financial Officer (CFO), the Council also committed to allocating a share of the generated revenue towards an accelerated full local match for the federal Earned Income Tax Credit (EITC) and the establishment of a local child tax credit of $1,000 per child for eligible families.”
Looking ahead, the D.C. Council’s emergency amendment is set to be in effect for 90 days, with intentions for a temporary extension lasting 225 days. A permanent measure will necessitate additional Council votes and possibly more public engagement. For now, taxpayers in D.C. should prepare for the absence of the federal tax breaks on tips and overtime in their local returns for the year 2025.