California State Income Tax: What You Need to Know

California's state income tax system is one of the most progressive in the country, with rates that top out higher than almost any other state. If you live or work in California, understanding how the state taxes income is essential — especially if you earn a high income, have investment income, or work remotely for an out-of-state employer.

California Tax Rates

California has nine income tax brackets for individuals, ranging from 1% on the first $10,099 of taxable income to 12.3% on income above $1 million. There's also a 1% Mental Health Services Tax on income above $1 million, bringing the effective top rate to 13.3% — the highest state income tax rate in the nation. Unlike federal rates, California's rates are not indexed as aggressively for inflation.

Who Must File

California residents must report all income from all sources on their CA return, regardless of where it was earned. Nonresidents who earn income from California sources — including working remotely for a California employer while physically in California, selling California property, or receiving California-source wages — must file a nonresident return and pay tax on that California-source income.

Remote Workers and California's Tax Reach

California aggressively asserts tax jurisdiction. If you work remotely but your employer is in California, the source of the income matters: income is taxed where the work is performed, not where the employer is located. So if you physically work in Texas, California generally can't tax that income (though the details depend on your specific situation).

Capital Gains

California taxes capital gains as ordinary income. Unlike the federal return, there are no lower rates for long-term capital gains in California. If you sell investments that produced significant gains, plan for California's ordinary income rates on top of the federal capital gains rate.

The Standard Deduction and Itemizing

California has its own standard deduction, which is much lower than the federal amount ($5,202 for single filers, $10,404 for married filing jointly in 2023). Many California taxpayers itemize on their state return even if they take the federal standard deduction, because California still allows a deduction for state and local taxes paid (SALT) — unlike the federal return, which caps the SALT deduction at $10,000.

California SDI

California withholds State Disability Insurance (SDI) from employee wages. As of 2024, there is no wage cap on SDI contributions, meaning higher earners pay more. SDI is not deductible on your California state return, but it may be deductible as a state tax paid on your federal Schedule A if you itemize.