California vs. Federal Tax: Key Differences
The income California taxes that the IRS doesn't, the income it skips, and the federal deductions that don't carry over.
Your California return starts from your federal adjusted gross income, then Schedule CA adds back what California taxes and the IRS doesn't, and subtracts what the IRS taxes and California doesn't. The big ones: California doesn't tax Social Security, unemployment or Paid Family Leave, but it taxes capital gains at ordinary rates, doesn't recognize HSAs, and doesn't follow the 2025 federal deductions for tips, overtime and car loan interest.
Rates and the standard deduction
| Single filer | California (2025) | Federal (2026) |
|---|---|---|
| Number of brackets | 9 (plus a 1% surcharge) | 7 |
| Top rate | 12.3% over $742,953, 13.3% over $1,000,000 | 37% over $640,600 |
| Standard deduction | $5,706 | $16,100 |
| Personal exemption | $153 credit | None |
| Long-term capital gains | Ordinary rates | 0%, 15% or 20% |
California's latest published figures are for the 2025 tax year; the federal column is 2026. California's standard deduction is much smaller, so many homeowners who take the federal standard deduction still come out ahead itemizing on the California return. You can make a different choice on each return. For the full schedule see California income tax rates and brackets.
Income California doesn't tax
- Social Security and Tier 1 railroad retirement benefits. See Is Social Security taxed in California?
- Unemployment benefits and Paid Family Leave benefits.
- Interest on U.S. obligations: Treasury bills, notes and bonds and U.S. savings bonds.
- California Lottery winnings, including Powerball and Mega Millions tickets bought here. Other gambling winnings are taxable. See Does California tax lottery winnings?
- A state income tax refund that you had to report federally.
- Military retirement pay: up to $20,000 a year for tax years 2025 to 2029, if federal AGI is $125,000 or less ($250,000 joint).
Income and deductions California treats less kindly
- Capital gains are ordinary income. There's no lower rate for long-term gains or qualified dividends. See California capital gains tax explained.
- HSAs. Contributions aren't deductible, employer contributions are added to your wages, and earnings inside the account are taxed each year. See California HSA tax rules.
- No QBI deduction. The federal 20% deduction for pass-through business income doesn't apply.
- Tips, overtime and car loan interest. The federal deductions created in July 2025 (Schedule 1-A) don't carry over: FTB lists California as not conforming to any of the three.
- State income tax and SDI aren't deductible on the California return, and neither is state sales tax.
Where California is more generous
- No SALT cap. The federal itemized deduction for state and local taxes is capped at $40,000. California doesn't follow the cap, so property tax is deductible in full (income tax itself still isn't).
- Mortgage interest. California still allows interest on up to $1,000,000 of acquisition debt (federal: $750,000), plus home equity loan interest that the federal rules disallow.
- Moving expenses remain deductible for everyone in California (federally, only for active-duty military).
- State credits with no federal match, such as the renter's credit, CalEITC and the Young Child Tax Credit. See CalEITC explained.
Why the two returns drift apart
California conforms to the Internal Revenue Code as of a set date. For 2025 returns that date is January 1, 2025, so the July 2025 federal tax law (P.L. 119-21) applies in California only where the Legislature adopts it. That's why many federal changes show up as adjustments on Schedule CA rather than being automatic.
Payments and due dates
The filing deadline is April 15 for both, and California gives an automatic six-month extension to file (not to pay) without a form. Estimated payments differ: California wants 30%, 40%, 0% and 30% of the year's tax in its four installments, not 25% each. See the California tax deadlines calendar.
Estimate your California tax
The CA State Income Tax Calculator applies California's brackets, standard deduction and surcharge to your income. For take-home pay with both federal and state withholding, use the paycheck calculator.
Frequently Asked Questions
Does California follow federal tax rules?
Partly. California starts from your federal adjusted gross income and then adds and subtracts the differences on Schedule CA. It conforms to the Internal Revenue Code as of a fixed date (January 1, 2025 for 2025 returns), so later federal changes don't apply unless California adopts them.
Does California tax Social Security?
No. California excludes U.S. Social Security benefits and equivalent Tier 1 railroad retirement benefits, even though up to 85% can be taxable federally.
Does California have the no tax on tips or overtime deduction?
No. FTB says California does not conform to the federal deductions for qualified tips, overtime pay or car loan interest added in 2025, so those amounts stay taxable on your California return.
Does California tax capital gains at a lower rate?
No. All capital gains, short- or long-term, are taxed as ordinary income at California's regular rates, up to 12.3% plus 1% on taxable income over $1,000,000.
Can I deduct state income tax on my California return?
No. California doesn't allow a deduction for state and local income tax or SDI. It also doesn't apply the federal $40,000 cap, so property taxes are deductible in full if you itemize in California.
This article is for general information only and is not tax advice. Sources: FTB 2025 Instructions for Schedule CA (540); FTB 2025 Tax Rate Schedules and Form 540 booklet; FTB Summary of Federal Income Tax Changes (P.L. 119-21, secs. 70201-70203); FTB Schedule K-1 (568) instructions (IRC 199A); IRS Rev. Proc. 2025-32 (2026 federal brackets and standard deduction).