What Is the SALT Marriage Penalty and How Does It Work?

The State and Local Tax (SALT) deduction allows taxpayers to reduce their federally taxable income by amounts paid for certain state and local taxes, including property taxes and either state income or sales taxes. This deduction helps prevent a form of double taxation, where the same income would be taxed at both the state and federal levels.

A “marriage penalty” exists when a married couple’s total tax liability is higher than it would have been if they filed as two single individuals. The SALT marriage penalty is created by a federal limitation on the SALT deduction. This cap treats single filers and married couples identically, which can lead to a higher tax burden for married pairs.

Understanding the $10,000 SALT Cap

The Tax Cuts and Jobs Act of 2017 (TCJA) established a cap on the amount of state and local taxes a household can deduct from its federal income. For tax years 2018 through 2025, this limit is $10,000 per year. This cap applies to the combined total of property taxes and either state income or sales taxes.

The structure of this cap is the direct cause of the marriage penalty. A single individual is entitled to a $10,000 SALT deduction, and a married couple filing a joint return is subject to the same $10,000 cap. This means two individuals who could have each deducted $10,000 before marriage are limited to a single $10,000 deduction after marriage, halving the potential deduction per person.

This provision contrasts with other parts of the tax code, like the standard deduction, where the amount for married couples is double that for single filers. The TCJA also increased the standard deduction, meaning fewer taxpayers itemize deductions. For those who do itemize, particularly in high-tax areas, the flat $10,000 cap creates a financial disadvantage for being married. For taxpayers who choose the Married Filing Separately status, the cap is halved to $5,000 each.

Quantifying the Marriage Penalty

The penalty materializes from the lost deduction capacity that occurs when two individuals marry and file a joint tax return. This effect is most pronounced for couples where both partners have high state and local tax liabilities.

Consider two unmarried individuals, Alex and Ben, who live in a state with high taxes. Alex pays $12,000 in state and local taxes, and Ben pays $13,000. As single filers, each could claim the maximum $10,000 SALT deduction, allowing them to collectively deduct $20,000 from their federal taxable income.

If Alex and Ben get married and file a joint tax return, their combined state and local tax payments total $25,000. On their joint return, their SALT deduction is limited to the single household cap of $10,000. By marrying, their total potential SALT deduction is reduced from $20,000 to $10,000, resulting in a lost deduction of $10,000.

This lost deduction translates into a higher federal tax bill. The amount of the penalty depends on the couple’s marginal tax bracket. If Alex and Ben are in the 24% federal income tax bracket, the $10,000 lost deduction increases their taxable income, resulting in an additional tax liability of $2,400 ($10,000 x 24%).

Navigating Filing and State Workarounds

Federal Filing Status

One avenue for couples impacted by the SALT cap is to change their filing status from Married Filing Jointly to Married Filing Separately (MFS). While this allows each spouse to deduct up to their separate limit, this approach comes with financial trade-offs. These trade-offs often make it disadvantageous for most taxpayers.

Choosing the MFS status disqualifies or limits a couple’s ability to claim several tax deductions and credits, and the benefits lost often exceed any advantage gained. These can include:

• The Earned Income Tax Credit
• Education-related deductions like the student loan interest deduction
• The American Opportunity and Lifetime Learning Credits
• The ability to contribute to a Roth IRA
• Deductions for traditional IRA contributions

State-Level Pass-Through Entity Tax Workarounds

In response to the federal SALT cap, many states enacted a workaround for business owners called a Pass-Through Entity Tax (PTET). This strategy benefits owners of pass-through businesses, such as S corporations, partnerships, and some LLCs. In these businesses, profits are normally “passed through” to be taxed on the owners’ individual returns.

Under a PTET regime, the business can elect to pay state income tax at the entity level instead of the owners paying it personally. This payment is treated as a business expense and is fully deductible on the business’s federal tax return without limitation. This shifts the state tax payment from a personal itemized deduction subject to the $10,000 cap to an unrestricted business deduction.

The individual owners then receive a credit on their personal state income tax returns for the tax the entity paid on their behalf, preventing double taxation at the state level. The IRS sanctioned this approach in Notice 2020-75, confirming these entity-level taxes are not subject to the individual SALT deduction cap. This workaround is only available in states with specific PTET legislation and only applies to income from the pass-through business.