What is new in California for 2026: a 3.4% indexing bump, a conformity date that missed the federal law, and what the voters decided

California changed its tax law in 2025 by moving one date, and that date is why almost nothing from the July 2025 federal tax act shows up on a California return. Senate Bill 711, signed October 1, 2025, moved the state’s general conformity to the Internal Revenue Code from January 1, 2015 to January 1, 2025. The federal act passed on July 4, 2025. So the Franchise Tax Board says plainly that California “in general does not conform” to it: tips, overtime pay, the $6,000 senior deduction and car-loan interest are all taxed in full by California, and the higher federal SALT cap, the 529 expansions and the bigger small-business-stock exclusion are added back on Schedule CA (540). What did change for 2026 is the arithmetic. The brackets, standard deduction and exemption credits all rose 3.4%, the first alimony agreements that follow federal law are being signed, and the state disability insurance rate went up a tenth of a point. Five tax measures were on the November 3, 2026 ballot: voters made the top income tax brackets permanent and turned down the one-time tax on billionaires, and none of the five changes the 2026 return.

For a household with wages, a mortgage and children, the practical effect is this: the 2026 California tax on the same income will be a little lower than 2025 because of indexing, and the federal savings everyone heard about in 2025 will not be matched on the state line. Nothing has to be added back for tips, overtime or the senior deduction, because Form 540 starts from federal adjusted gross income and those deductions come off after it. The state never saw them leave.

The numbers moved 3.4%

The Department indexes the brackets, the standard deduction, the exemption credits and the renter’s credit income limits to the California CPI, June to June. For 2026 that came to 3.4%, up from 3.0% a year earlier. The rate schedules appeared in the Department’s October 2026 Tax News; the phase-out thresholds, filing thresholds, AMT exemption and CalEITC maximums follow in late December and are marked “to come.”

Both years from the Department’s October Tax News. The $1,000,000 surtax line is fixed in statute and is the same for a single filer and a married couple; it is the one California threshold that does not double on a joint return. The full 2026 tables are in California figures at a glance.

The rates did not change: nine brackets from 1% to 12.3%, plus the 1% surtax on taxable income over $1,000,000, for a top combined rate of 13.3%. The surtax was renamed in 2025, from the Mental Health Services Tax to the Behavioral Health Services Tax. The amount is the same.

SB 711 and SB 1435: the conformity story

For ten years California’s tax code pointed at the Internal Revenue Code as it stood on January 1, 2015. Every federal change since, the 2017 act included, had to be adopted piece by piece or not at all. SB 711, the Conformity Act of 2025, moved the reference date to January 1, 2025, for taxable years beginning on or after that date. It picked up a decade of federal housekeeping and stopped three months short of the July 2025 federal act. The Department’s March 2026 Tax News puts it in one sentence: SB 711 “does not include federal tax law enacted after January 1, 2025.”

Senate Bill 1435, signed September 14, 2026 as Chapter 233, is the cleanup bill. It fixes the CalEITC investment-income limit at $3,400 regardless of the federal figure, keeps the personal income tax out of the federal business-interest limit under IRC Section 163(j), and corrects the excess business loss computation so that wages from a job are left out. All of it is retroactive to taxable years beginning on or after January 1, 2025.

The first five rows from the Department’s 2025 Schedule CA (540) instructions and March 2026 Tax News; the last three rows summarize longstanding California positions. The pattern is the same everywhere: a federal deduction taken after AGI never reaches California, and a federal exclusion taken before AGI has to be added back.

Alimony: the one conformity change that bites in 2026

Federal law stopped deducting and taxing alimony for agreements executed after 2018. California kept the old rule, so for seven years a California payer deducted alimony on Schedule CA and a recipient reported it. SB 711 ends that going forward. For a divorce or separation agreement executed after December 31, 2025, or an older one modified after that date to adopt the new rule, alimony is not deductible by the payer and not income to the recipient on the California return. The Department says “no adjustment is needed.” Agreements from 2019 through 2025 keep the California deduction and inclusion. A Californian negotiating a settlement in 2026 should know which side of the line the signing date falls on; the state tax effect runs to 13.3%.

Still running from 2025

Military retirement exclusion, year two. For 2025 through 2029, up to $20,000 of uniformed-services retirement pay and, separately, up to $20,000 of Survivor Benefit Plan payments are excluded on Schedule CA if federal AGI is $125,000 or less ($250,000 joint). The cap is not indexed. SB 1407, which as amended would have doubled it to $40,000, was held in an Assembly committee in August 2026 and did not pass.

Pass-through entity elective tax, extended. The 9.3% entity-level tax that lets S-corporation shareholders and partners work around the federal SALT cap was due to expire after 2025. SB 132 extended it for taxable years beginning before January 1, 2031. For 2026 through 2030 a short June 15 prepayment reduces the owner’s credit rather than voiding the election.

Net operating losses and business credits, last suspended year. For 2024 through 2026, a filer with net business income or modified AGI of $1,000,000 or more may not deduct NOL carryovers and may use no more than $5,000,000 of business credits.

State disability insurance. The employee SDI rate is 1.3% for 2026, up from 1.2%, with no wage ceiling. SDI is not deductible on the California return, and the line for excess SDI withheld by two employers is gone from Form 540; with no wage cap there is no excess to refund.

What the voters decided on November 3, 2026

Five measures touched taxes. Proposition 3 passed with about 59%: the 10.3%, 11.3% and 12.3% brackets, first approved in 2012 and due to expire after 2030, are now permanent. Proposition 40, the one-time 5% tax on net worth above $1 billion, was rejected, about 55% to 45%. Proposition 42, which bars new state taxes on the ownership of personal property, including savings and retirement holdings, and bars retroactive taxes, passed. Proposition 41, which would have limited new taxes outside the state spending limit, and Proposition 43, which would have required a two-thirds vote for local special taxes proposed by initiative, were both rejected. The counts are unofficial until the Secretary of State certifies them in December.

Proposition 3 makes permanent the three top brackets, 10.3%, 11.3% and 12.3%, that voters first approved in 2012 as Proposition 30 and extended in 2016 as Proposition 55. Under the old law they expired after 2030, and income above what is now $384,109 on a single return would have fallen back to 9.3%. Proposition 3 does not raise any rate for 2026; it settles what happens after 2030. The revenue goes mainly to K-12 schools and community colleges.

Proposition 40, the billionaire tax, which voters rejected, would have imposed a one-time 5% tax on the net assets over $1,000,000,000 of anyone who was a California resident on January 1, 2026, valued as of December 31, 2026, reported with the 2026 California income tax return and payable April 15, 2027 or over five years. The part that would have reached everyone else was a certification: as drafted, every filer would have had to state on the 2026 return whether their net worth was above or below $1 billion. With the measure defeated, there is no new line or checkbox on Form 540.

Propositions 41 and 42 were the countermeasures. Proposition 41, which failed, would have required audits of new special taxes and barred them from being excluded from the state spending limit. Proposition 42, which passed, bars new state taxes on the ownership of personal property, financial assets included, and bars taxes applied retroactively to a past status such as residency; it would have blocked the billionaire tax even if Proposition 40 had passed. Proposition 43, on local citizen-initiated taxes, failed and does not touch the income tax.

The 2026 return next to the 2025 return

What else will look different on the 2026 Form 540: the alimony line on Schedule CA goes blank for new agreements; the SDI excess line is gone; and, if Proposition 40 prevails, a net-worth certification appears. What will look the same: no line for tips, overtime, the senior deduction or car-loan interest, because there never was one, and the HSA add-back, the Social Security subtraction and the health-coverage penalty on Form FTB 3853 all continue. The 2025 penalty was $950 per adult and $475 per child, capped at $2,850 for a household; the 2026 figures are to come.

Smaller items

• Interest on underpayments is 7% for January 1 through June 30, 2027, compounded daily.
• IRS Direct File, which handed California filers to CalFile in the 2025 filing season, was discontinued before the 2026 season and has not returned. CalFile, the Department’s own free e-file for the state return, continues.
• Student loan forgiveness: the federal exclusion for 2021 through 2025 has expired. California’s own exclusions for death and disability discharges and for public service and income-driven forgiveness continue (verify); other 2026 discharges are taxable in both places.
• No California city or county levies an income tax, and none was on the ballot.