D.C. Launches Local Child Tax Credit, Breaks from Feds

Washington, D.C. is reshaping local tax policy in a historic way. On November 5, 2025, the D.C. Council voted to create the nation’s first citywide child tax credit, offering up to $1,000 per qualifying child beginning with the 2026 tax season. Alongside this major initiative, the city also announced it will decouple its local tax code from several provisions of the federal One Big Beautiful Bill Act (OBBBA).

This decision represents more than just a fiscal maneuver. It reflects a broader movement among jurisdictions seeking to regain control over local tax bases and better serve their own residents. For tax professionals, this development carries immediate planning implications for 2026 filings and beyond.

What Happened

Washington, D.C. enacted the nation’s first citywide child tax credit, effective for the 2026 tax season. The refundable credit offers up to $1,000 per eligible child, based on income thresholds similar to the federal Child Tax Credit (CTC).

To fund this, the city voted to decouple its tax code from 13 of the 84 federal tax provisions under the OBBBA, freeing approximately $600 million in local revenue. Of this, an estimated $239 million will finance tax relief measures, including the child tax credit.

Council Chair Phil Mendelson emphasized that this move aims to “restore fairness and independence” to D.C.’s tax system, counteracting federal tax changes that disproportionately reduced local revenues without benefiting D.C. taxpayers.

The D.C. Office of Tax and Revenue will establish rules and refund mechanisms ahead of 2026 filings. Key details such as income phaseouts and refundability will be finalized early next year.

Why It Matters for Tax Professionals

For CPAs and tax attorneys:

This new refundable child tax credit introduces a new line item on D.C. returns starting 2026 and can increase refunds even for low or no income taxpayers.

The decoupling from federal provisions means D.C. taxable income will differ from federal taxable income in key areas such as overtime, tips, and business deductions. Software updates, recalculations of addbacks and subtractions, and adjusted planning strategies are essential.

Tax attorneys must scrutinize depreciation, income sourcing, and credit treatment where federal conformity breaks, to ensure compliance and accuracy.

For business owners:

Payroll and withholding processes may need adjustment as employees inquire about the new credit's impact. Decoupling affects how fringe benefits and overtime pay are treated locally, raising compliance considerations for employers.

Businesses operating across multiple jurisdictions must not assume federal reforms flow uniformly to local returns, necessitating updated systems to handle varied local policies.

For individual taxpayers:

The new refundable credit can significantly aid D.C. families managing rising housing, education, and childcare costs. Eligible taxpayers may claim both the federal and local child tax credits for combined benefits of potentially thousands annually.

What’s Next

The D.C. Office of Tax and Revenue will release guidance in early 2026 outlining eligibility, phaseout thresholds, and refund procedures. Tax firms should prepare software systems and client projections accordingly.

Professionals must monitor administrative rules clarifying effects of decoupling, especially for depreciation schedules, business income adjustments, and tip reporting. These changes will affect both individuals and businesses starting with the 2026 tax year.

If D.C.'s initiative proves successful, other jurisdictions like New York, California, and Oregon may adopt similar local fiscal autonomy measures.

The Bottom Line

D.C.’s launch of a city-level child tax credit coupled with decoupling from federal tax rules marks a pivotal evolution in local tax policy. New compliance challenges arise, but so do strategic planning opportunities for tax professionals and business owners.

Proactively educating clients, updating planning software, and modeling potential impacts will position tax advisors and attorneys to capitalize on this evolving landscape. Early preparation safeguards clients from surprises and captures valuable financial benefits.

Try Bizora today to stay informed on every new federal and state tax development that impacts planning, compliance, and client advisory work.

Frequently Asked Questions (FAQ)

What is the new D.C. child tax credit?

It is a refundable local credit of up to $1,000 per qualifying child, starting with the 2026 tax year, designed to supplement the federal child tax credit.

How does decoupling from federal tax rules affect D.C. tax returns?

D.C. will no longer conform to certain federal tax provisions introduced by the OBBBA, meaning D.C. taxable income and deductions may differ from federal calculations, requiring careful planning.

Who is eligible for the D.C. child tax credit?

Eligibility is based on income thresholds similar to the federal child tax credit, with final rules expected early 2026.

Do businesses need to adjust payroll or withholding?

Yes. Although the credit is claimed individually, employers may receive inquiries and need to prepare for withholding adjustments related to local tax code changes.

When will official guidance be available?

The D.C. Office of Tax and Revenue plans to issue final guidance on the credit and decoupling details early in 2026.