The SALT Cap's Marriage Penalty Is No Legislative Mistake

The Working Families Tax Cuts expanded a federal tax deduction for state and local taxes, but the way Congress structured the benefit has created a financial disadvantage for some married couples. That outcome was a deliberate part of the negotiations, as lawmakers from high-tax states sought to extend the deduction to as many of their constituents as possible.

The state and local tax (SALT) deduction allows taxpayers who itemize their federal income tax returns to deduct certain state and local income, sales, and property taxes from their federally taxable income, up to a specified limit. The deduction reduces federal income taxes for eligible taxpayers, with the largest potential benefits going to those who pay substantial state and local taxes.

A recent Bloomberg report examines how the expanded deduction has prompted some high-income couples to consider delaying marriage or even divorcing to reduce their federal tax bills. The problem arises because two unmarried taxpayers can each claim the deduction, while a married couple filing jointly is subject to a single cap.

This creates what tax policy experts call a marriage penalty, which occurs when two people owe more in combined taxes as a married couple than they would if they remained unmarried and filed separate returns.

Congress Chose to Cover More Taxpayers

The Working Families Tax Cuts increased the SALT deduction cap from $10,000 to $40,000 in 2025, with the cap rising to $40,400 in 2026. The higher deduction is subject to income-based limitations that reduce its value for higher earners.

During negotiations, Republican lawmakers from New York and New Jersey pushed for a larger deduction to benefit constituents facing substantial state income and property taxes. The final agreement reflected their efforts to extend federal tax relief to more taxpayers in high-tax states.

Congress could have established a $20,000 cap for single taxpayers and a $40,000 cap for married couples filing jointly. That approach would have provided married couples with twice the deduction available to single taxpayers, but it also would have reduced the deduction available to unmarried filers.

Instead, Congress adopted the same $40,000 cap for both filing statuses. Two unmarried taxpayers could therefore potentially deduct a combined $80,000 in state and local taxes, while the same two people filing jointly as a married couple would be limited to $40,000.

Maintaining the same cap for both filing statuses allowed more single taxpayers to benefit from the expanded deduction, particularly in states with high income and property taxes. The resulting marriage penalty was a foreseeable consequence of that decision rather than an error in the legislation.

Bloomberg Highlights the Cost of the Marriage Penalty

Bloomberg illustrated the disparity using a hypothetical California couple earning a combined $700,000 annually.

Under the report's simplified calculations, the couple would owe approximately $171,000 in federal income taxes if married and filing jointly. If they remained unmarried and filed separately as single taxpayers, their combined federal income taxes would fall to approximately $148,000.

That represents a $23,000 difference in annual federal income taxes based on marital status. The precise savings would depend on each couple's income, deductions, and other tax circumstances, but the example demonstrates how the SALT deduction can create a substantial financial incentive against marriage.

The disparity has prompted proposals to increase the deduction for married couples. However, raising the cap would expand an existing federal tax preference rather than address the underlying problems with the deduction.

The SALT Deduction Rewards High State Taxes

The broader concern is that the SALT deduction allows taxpayers to reduce their federal income taxes based on how much they pay to state and local governments.

For example, a taxpayer who deducts an additional $10,000 in eligible state and local taxes and faces a 24% federal marginal income tax rate could save $2,400 in federal income taxes. The federal government effectively absorbs part of the cost of those state and local taxes through lower federal revenue.

This arrangement is particularly beneficial to eligible taxpayers in states such as New York, New Jersey, and California, where income and property taxes can be substantial. Taxpayers in states with lower taxes generally have fewer opportunities to benefit from the deduction.

The SALT deduction therefore creates a federal tax preference for residents with substantial state and local tax bills. Expanding the deduction for married couples would increase that preference and provide additional federal tax relief to some of the same high-income households already benefiting from the higher cap.

A Zero SALT Cap Would Eliminate This Marriage Penalty

There is a more direct way to eliminate the marriage penalty created by the SALT deduction: reduce the cap to $0.

Under that approach, neither single taxpayers nor married couples would be permitted to deduct state and local taxes from their federal taxable income. Two unmarried taxpayers would receive the same combined SALT deduction as a married couple, which would be zero in both cases.

Other marriage penalties in the federal tax code would remain, but the disparity created by the SALT deduction would disappear.

Eliminating the deduction would also end the federal tax preference for high state and local taxes. States would remain free to establish their own tax policies, but their residents would no longer receive federal income tax relief simply because their state or local governments impose higher taxes.

CFE Takeaway

The marriage penalty associated with the expanded SALT deduction was a foreseeable result of the Working Families Tax Cuts negotiations. Congress chose to make the same deduction cap available to single and married taxpayers so that more residents of high-tax states could benefit.

Congress should not respond by expanding the deduction further. Eliminating the SALT deduction would remove this particular marriage penalty while ending a federal tax preference that disproportionately benefits taxpayers with substantial state and local tax bills.