How California income tax works: federal AGI, Schedule CA, nine brackets to 13.3%

California’s return is a two-track return. Form 540 begins with federal adjusted gross income, line 11 of the 1040. Then Schedule CA (540) takes over and California goes its own way: Social Security comes out, health savings account money goes back in, the state uses its own standard deduction of $5,900 single and $11,800 joint for 2026, lets you itemize for California while taking the federal standard deduction, hands out exemption credits instead of exemption deductions, and runs the result through nine brackets from 1% to 12.3%, plus a 1% surtax on taxable income over $1,000,000. The top combined rate is 13.3%, the highest in the country. Almost none of the 2025 federal law reached this return, and there is no local income tax anywhere in the state.

The reason California conforms to so little of the federal law is a date. In October 2025 the legislature moved the state’s conformity date from January 1, 2015 to January 1, 2025, three months before the federal act was signed, so the Franchise Tax Board, the Department from here on, says California “in general does not conform” to it. Tips, overtime, the $6,000 senior deduction and car-loan interest are deducted federally below the AGI line; Form 540 starts above it, so they are taxed in full here with no add-back needed. They simply never leave California income.

Who files, and on what

A resident reports worldwide income on Form 540 (540 2EZ for the simplest returns); nonresidents and part-year residents use Form 540NR. For 2025 a single person under 65 with no dependents had to file at $22,941 of gross income or $18,353 of AGI; 2026 thresholds are to come in late December. Below the line it is still worth filing to recover withholding or claim the refundable CalEITC. Head of household requires Form FTB 3532, which the Department reads closely.

Where it starts: federal AGI

Line 13 of Form 540 is federal adjusted gross income. Everything the federal return does after AGI, the standard and itemized deductions, the senior, tips and overtime deductions, QBI, is invisible to California unless Schedule CA brings it back in a California version. Everything done before AGI flows in automatically unless Schedule CA takes it out. The HSA deduction is the one that gets taken out.

Schedule CA: where California leaves

Schedule CA (540) has three columns. Column A is the federal figure, column B subtracts what California does not tax, and column C adds what California taxes and the IRS does not. The result is California AGI on line 17. For most households the subtractions outweigh the additions.

The HSA is the item most often missed on a self-prepared return. Nothing on the W-2 flags it for California; the code W amount is added to wages by hand, and the account’s 1099s are reported as if it were an ordinary brokerage account.

Deduction: California’s own, and a free choice

California’s standard deduction is $5,900 for single and married filing separately, $11,800 for joint, head of household and qualifying surviving spouse, for 2026. Against the federal $32,200 joint it is small, which is why a household that takes the standard deduction on both returns pays California tax on a far larger share of its income.

The remedy is a rule many filers do not know: you may itemize for California while taking the federal standard deduction, and the other way round. California itemized deductions start from federal Schedule A on Part II of Schedule CA and are then adjusted. State income tax, SDI and sales tax are never deductible here. Property tax is deductible with no cap; what the federal $40,000 SALT limit cut off is added back on line 5e. Mortgage interest is allowed on up to $1,000,000 of acquisition debt plus $100,000 of home equity debt. Medical expenses over 7.5% of AGI, charitable gifts up to 50% of AGI, all casualty and theft losses, gambling losses to the extent of winnings without the new federal 90% haircut, and the old miscellaneous deductions over 2% of AGI, including unreimbursed employee expenses and tax preparation fees, are still allowed. A homeowner with $14,000 of mortgage interest and $7,000 of property tax clears the $11,800 standard deduction easily, whatever the federal return did. Above $252,203 single or $504,411 joint of AGI (2025 thresholds; 2026 to come), itemized deductions are trimmed by 6% of the excess, up to 80%.

Exemption credits, not exemptions

California abolished exemption deductions long ago and replaced them with credits against the tax. For 2026 the credit is $158 per taxpayer ($316 on a joint return), $491 for each dependent, and an additional $158 for each spouse 65 or older and for blindness. A married couple with two children takes $1,298 off the tax itself. The credits are nonrefundable, and a dependent claimed by someone else gets no personal credit. Above $252,203 of federal AGI single, $378,310 head of household or $504,411 joint (2025 thresholds; 2026 to come), each credit shrinks by $6 for every $2,500 of excess, $12 per $2,500 on a joint return.

The rates

California AGI minus the deduction is taxable income, line 19, taxed through nine brackets. Joint brackets are exactly double the single ones. Capital gains, dividends, interest and wages are taxed alike; there is no preferential rate for long-term gains.

Indexed 3.4% for 2026. The 1% Behavioral Health Services Tax on line 62 uses the same $1,000,000 line for every filing status; it is the one figure on the return not doubled for a couple. The Department will post the complete 2026 schedules and exemption amounts in late December 2026.

The long 9.3% bracket is where most working households sit: from $75,197 of taxable income single and $150,394 joint up to $384,109 and $768,218. The three brackets above it had been due to expire after 2030; Proposition 3, approved November 3, 2026 with about 59% of the vote, makes them permanent. Nothing about the 2026 rates changed.

The credits

After the exemption credits comes a short list of others, most of them nonrefundable. The refundable ones are California’s own earned income credit and its companions on Form FTB 3514, which are not a percentage of the federal credit.

No general child tax credit, no 529 deduction, no education credit, no property-tax credit on the return. The family credits are covered in Credits and breaks for California families.

How it is paid in

Withholding. California withholding is set on Form DE 4 from the Employment Development Department, not on the federal W-4; an employee who files only a W-4 is withheld as single with zero allowances. Each job’s withholding starts in the 1% bracket, so two-job households and two-earner couples are routinely under-withheld and should add a flat amount per paycheck. The same paycheck carries State Disability Insurance at 1.3% for 2026 with no wage ceiling; SDI is not deductible on the California return and is not refunded.

Estimated payments. Anyone who expects to owe $500 or more ($250 married filing separately) after withholding must pay estimates on Form 540-ES, and California front-loads them: 30% by April 15, 40% by June 15, nothing in September, 30% by January 15. The safe harbor is 100% of last year’s tax, 110% if last year’s California AGI was over $150,000, and none at all once this year’s AGI reaches $1,000,000. Once a single payment exceeds $20,000 or a return shows tax over $80,000, every later payment must be electronic or a 1% penalty applies. The underpayment penalty is on Form FTB 5805.

The return. Form 540 is due April 15, 2027. The extension to October 15 is automatic with no form, but it extends the filing, not the payment; tax not paid by April 15 goes in with Form FTB 3519 and draws penalty and 7% interest. CalFile is the Department’s own free e-file. Two lines near the bottom catch people: line 91, use tax on out-of-state purchases, and line 92, the Individual Shared Responsibility Penalty on Form FTB 3853 for months without health coverage, which survives here though the federal penalty is gone. The dates and forms are collected in California calendar and forms.

No local income tax

No California city, county or school district taxes an individual’s income; San Francisco’s gross receipts and payroll taxes fall on employers. What Californians pay locally is property tax under Proposition 13, 1% of assessed value plus voter-approved bonds, with assessments growing no more than 2% a year until a sale, and district sales taxes of 0.10% to 2.00% on top of the 7.25% state rate. There is no estate, inheritance or gift tax.

What trips people up

• HSA contributions left out of California wages, and HSA earnings never reported.
• Taking the California standard deduction because the federal return did.
• Expecting the federal tips, overtime or senior deduction to lower California tax. It never reaches the return.
• A 529 withdrawal for private-school tuition, tax-free federally, taxable in California plus 2.5%.