How the California Millionaire Tax Works
Understand the structure of California's high-income tax. This guide explains how a specific surtax and progressive rates combine to determine total tax liability.
The term “millionaire tax” in California is not an official designation but a colloquialism describing the combined effect of the state’s highly progressive income tax system and a specific surtax for high earners. This multi-layered approach results in one of the highest state tax burdens in the nation for those with substantial earnings. Understanding this structure requires looking at two components: the state’s standard income tax brackets and a surtax levied on incomes exceeding a certain threshold. The combination of these elements creates the significant tax liability often referred to as the millionaire tax.
The Behavioral Health Services Tax
The tax most accurately described as the “millionaire tax” is the Behavioral Health Services Tax. Its core provision is a 1% tax levied on a taxpayer’s personal income in excess of $1 million. This threshold applies regardless of the filing status, meaning single filers, heads of household, and those married filing jointly all become subject to the tax once their net income crosses the $1 million mark.
This is a surtax, meaning it is calculated and paid in addition to the regular state income tax. The revenue generated by this 1% surtax is specifically earmarked to fund behavioral health programs. These funds are distributed to counties to expand and improve services for both mental health and substance use disorders.
California’s Top Marginal Income Tax Rates
Separate from the 1% surtax, California employs a progressive income tax system with nine brackets and rates ranging from 1% to 12.3%. The highest rate of 12.3% applies to the highest earners, making it one of the highest top marginal state income tax rates in the United States. The income thresholds for these brackets are indexed for inflation and can change annually.
When the top marginal rate of 12.3% is combined with the 1% surtax, the top state tax rate on personal income over $1 million is 13.3%. For wage earners, California’s State Disability Insurance (SDI) payroll tax of 1.1% also applies to all wage income without an income cap. This brings the top marginal state tax rate on wages to 14.4%.
Calculating Total California Tax Liability
To determine the total California tax liability for a high-income earner, one must combine the regular income tax with the 1% surtax on income over $1 million. The process begins with calculating the regular tax based on the state’s progressive bracket system on the taxpayer’s California taxable income.
Consider a hypothetical single filer with $1.5 million in California taxable income. First, they would calculate their regular income tax using the marginal rates. They would pay 1% on their first portion of income, 2% on the next, and so on, up through the brackets until reaching the top rate of 12.3% on all income over the top bracket’s threshold.
After calculating the regular income tax, the 1% surtax is computed separately. The surtax is applied to all taxable income exceeding $1 million. In the example of the single filer with $1.5 million in income, the tax would apply to $500,000 of that income ($1,500,000 – $1,000,000), resulting in a surtax of $5,000. The final step is to add the regular income tax and the surtax together to arrive at the total California tax liability.
Tax Planning for High-Income Earners
Individuals facing California’s high tax rates often engage in specific tax planning to manage their liability.
- Maximize contributions to tax-deferred retirement accounts. By contributing the maximum allowable amount to a 401(k) or a SEP IRA, taxpayers can reduce their current taxable income, lowering both their regular income tax and exposure to the 1% surtax. For 2025, the 401(k) contribution limit is $23,500, with additional catch-up contributions available for those age 50 and over.
- Use tax-loss harvesting. This involves selling investments at a loss to offset capital gains realized from other investments. These losses can directly reduce the amount of income subject to high marginal tax rates, and up to $3,000 of net capital losses can also be used to offset ordinary income annually.
- Practice strategic charitable giving. Bunching multiple years’ worth of charitable donations into a single year can help taxpayers exceed the standard deduction, allowing them to itemize and claim a larger deduction. Using a donor-advised fund allows an individual to take an immediate tax deduction for their contribution while distributing the funds to charities over time.
- Consider a change in residency status. Changing residency to a state with a lower or no income tax can fundamentally alter one’s state tax obligations, though this is a complex decision with significant legal and lifestyle implications.