California Income Tax: 2026 Brackets, Rates & How CA Taxes Your RSUs and Stock Options

California income tax tops out at 13.3% (12.3% plus the 1% Mental Health Services Tax over $1M) -- the highest state rate in the U.S. California taxes RSU vesting as ordinary income (employers withhold only 10.23%, leaving a shortfall many tech workers owe at filing), while ISO exercises -- as under federal rules -- create a California AMT preference rather than ordinary income.

If you work in tech in California (and the majority of tech employees still do), understanding these rules is worth tens of thousands of dollars.

This guide covers the complete California income tax picture for the 2025 tax year: brackets for all filing statuses, the Mental Health Services Tax, supplemental withholding rates, and the critical differences in how CA taxes RSUs, ISOs, and stock options.

California Income Tax Rates and Brackets (2025 Tax Year)

California uses a progressive tax system with 9 brackets plus the Mental Health Services Tax surcharge. Here are the current brackets:

Single / Married Filing Separately

Married Filing Jointly

California Standard Deduction (2025)

California's standard deductions are significantly lower than the federal amounts:

Compare that to the federal standard deduction of $15,000 (single) or $30,000 (MFJ) -- California gives you much less shelter. This means more of your income hits the CA brackets.

The Mental Health Services Tax

California's Mental Health Services Tax (MHST) adds an additional 1% on taxable income over $1,000,000. This applies regardless of filing status.

Key details:

• The $1M threshold is based on taxable income (after the standard deduction), not gross income
• It applies to ALL income types -- salary, RSU vesting, ISO exercises, capital gains
• Combined with the 12.3% top bracket, the effective top rate is 13.3%
• There is no marriage penalty -- the $1M threshold does not double for MFJ filers

For tech employees, reaching $1M in taxable income is more common than you'd think: a $250K salary plus $800K in RSU vesting in a single year puts you over the threshold. Large IPO vesting events, multi-year ISO exercises, or concentrated stock sales can all trigger the MHST.

Mental Health Tax Planning Example

Consider an employee with a $250K salary and $800K in RSU vesting in a single year:

By splitting the $800K RSU vesting across two years ($400K each), total taxable income stays below $1M in both years, avoiding the MHST entirely. For larger amounts, the savings scale: a $1.5M total income year triggers $5,000+ in MHST that could be avoided with timing.

California Supplemental Withholding Rate: 10.23%

When your RSUs vest, your employer withholds California state tax at the supplemental withholding rate of 10.23%. This is the flat rate California mandates for supplemental wages (bonuses, RSU vesting, stock option exercises).

Does 10.23% Match Your Actual Rate?

For most tech workers, 10.23% is close to their actual marginal rate:

• If you're in the 9.3% bracket ($72,724 -- $371,479 single), the employer over-withholds by roughly 1%
• If you're in the 10.3% bracket ($371,479 -- $445,771 single), it's approximately right
• If you're in the 11.3% or 12.3% bracket, the employer under-withholds, creating a state shortfall

Example: $100K RSU vest for someone in the 12.3% bracket

For high earners with large RSU grants, this shortfall compounds. $500K in RSU vesting at a 2% gap means $10,000+ in unexpected California taxes due at filing time.

How California Taxes RSUs

RSU taxation in California follows the same basic structure as federal: RSUs are taxed as ordinary income when they vest (IRS Publication 525). The full fair market value on the vesting date is included in your W-2 and subject to California income tax.

The withholding flow:

1. RSUs vest and shares land in your account
2. Your employer sells a portion to cover taxes (sell-to-cover)
3. California supplemental withholding: 10.23% of the vesting value
4. You receive remaining shares after all tax withholding

The shortfall problem: Your employer withholds 10.23% for California, but your actual marginal rate may be 9.3%, 10.3%, 11.3%, 12.3%, or even 13.3%. Use our RSU Calculator to find your exact California withholding shortfall based on your total income and filing status. For a deeper look at how each vesting event is taxed and withheld at the state level, see our guide to California RSU vesting and withholding tax.

For a complete walkthrough of how RSU withholding works at every level (federal, state, FICA), see our RSU tax withholding guide and our guide on how RSUs are taxed.

How California Taxes ISOs: The Critical Difference

This is the single most important state tax fact for anyone holding incentive stock options in California:

How this works in practice:

Suppose you exercise 10,000 ISOs with a $5 strike price and $25 FMV. The spread is $200,000.

This means a California ISO exercise can create both a federal AMT liability and a California AMT liability on the same $200,000 preference. The combined hit can be severe, and it's a major reason California tech employees need to plan ISO exercises carefully. We walk through this double-AMT scenario in detail in our guide to the California ISO exercise and state AMT trap.

Use our ISO AMT Calculator to model both the federal AMT impact and the California state tax on your ISO exercise.

California State AMT (7%)

California is one of the few states with its own Alternative Minimum Tax. The California AMT rate is 7% of tentative minimum taxable income.

Because California conforms to the federal ISO rules, the ISO bargain element is one of the most common triggers of California AMT -- just as it is for the federal AMT. Large ISO exercises, alongside other preference items, are exactly what push California residents into AMT.

ISO Worked Example: Exercising 1,000 Shares in California

Suppose you exercise 1,000 ISOs with a $2 strike price and $10 FMV (spread of $8/share, $8,000 total). Here's how California treats this differently from other states:

Unlike an NSO exercise, a qualifying ISO exercise creates no state ordinary income tax in California. Instead, the $8,000 spread is added to your federal and California AMT income -- so the practical cost depends on whether the exercise pushes you into AMT in either system. A large exercise (say 10,000 shares at a $20 spread, $200,000) can generate a substantial California AMT bill on top of the federal AMT.

This is why spreading ISO exercises across multiple years is especially important for California residents. Each year you exercise within a lower bracket saves thousands in state tax.

California Residency Rules for Equity Income

California's residency rules are aggressive when it comes to equity compensation. Understanding them is critical if you're considering a move out of state.

The safe harbor test: You're a California resident if you're present in the state for more than 9 months of the year. Below 9 months, California considers your domicile, family ties, and where your "closest connections" are.

Part-year sourcing of equity income: If you move out of California mid-year, your RSU vesting income is allocated between CA and your new state based on the ratio of work-days performed in each state. But there's a catch: RSUs granted while you were a California resident may be partially sourced to California even after you leave, based on the proportion of the vesting period spent in CA. Our guide to moving states mid-year with equity walks through this allocation and the credit that prevents double taxation.

Equity sourced to CA after departure: California's FTB takes the position that if you earned equity compensation while performing services in California, the state can tax a portion of that income even after you move away. The formula is:

CA-sourced portion = (CA work-days during vesting period) / (Total work-days during vesting period)

This means moving from California to Texas on January 1st doesn't eliminate CA tax on RSUs that vest on March 15th if the vesting period included months of California employment.

California Income Tax on Capital Gains

California does not offer a preferential tax rate for capital gains. Both short-term and long-term capital gains are taxed as ordinary income at your marginal rate (up to 13.3%).

This is a significant difference from the federal system, where long-term capital gains are taxed at 0%, 15%, or 20%. A California resident who sells appreciated stock pays up to 13.3% to California plus up to 20% (plus 3.8% NIIT) to the federal government -- a combined rate that can exceed 37%.

This matters for:

• Post-vesting RSU appreciation (selling RSU shares at a gain above the vesting price)
• ISO qualifying dispositions (selling after holding periods are met)
• Any stock or investment sales

One important exception cuts the other way: if your shares qualify as Qualified Small Business Stock, the federal gain may be partly or fully excluded -- but California does not follow the federal break, as explained in our guide to why California denies the QSBS Section 1202 exclusion.

The chart below puts California's burden in context against other major states for equity earners.

Planning Tips for California Tech Employees

1. Spread ISO exercises across multiple years. Because a large ISO exercise adds the full bargain element to both your federal and California AMT income, batching smaller exercises across years keeps your AMT exposure down in both systems and reduces total tax.

2. Track your supplemental withholding gap. If your total income puts you above the 10.3% bracket, your employer's 10.23% withholding isn't enough. Make estimated tax payments to avoid underpayment penalties.

3. Consider the Mental Health Tax threshold. If you're close to $1M in taxable income, timing equity events (RSU sales, ISO exercises) to stay below the threshold in a given year saves you 1% on every dollar above $1M.

4. Factor in the capital gains disadvantage. If you're holding appreciated stock, California's ordinary income treatment of capital gains means you pay more than residents of most other states on the same sale.

For a comparison across states, see our State Income Tax Guide and the individual guides for other calculator-supported states: Illinois, Massachusetts, New Jersey, and Oregon. For federal tax planning, see the 2026 Federal Tax Brackets guide. For a detailed breakdown of effective tax rates at different income levels, see our RSU tax rate guide. If you hold early-stage equity, our 83(b) election guide covers the critical 30-day filing window.

Frequently Asked Questions

What is California's top income tax rate? California's top income tax rate is 13.3%, which includes the base top rate of 12.3% plus the 1% Mental Health Services Tax on taxable income over $1,000,000. This is the highest state income tax rate in the United States.

Does California tax RSU income? Yes. California taxes RSU vesting income as ordinary W-2 income at your marginal rate (up to 13.3%). Your employer withholds California tax at the supplemental rate of 10.23%, which may be more or less than your actual marginal rate depending on your total income.

How does California tax ISO exercises? California conforms to the federal treatment of ISOs: a qualifying exercise creates no ordinary income for state or federal regular tax. Instead, the bargain element is a preference item for both the federal AMT and California's own 7% AMT. So an ISO exercise is not taxed as ordinary income the way an NSO is, but it can push you into AMT at both the federal and state level -- the key planning point for California ISO holders.

What is the California Mental Health Services Tax? The Mental Health Services Tax (MHST) is an additional 1% tax on taxable income exceeding $1,000,000. It applies regardless of filing status -- the $1M threshold does not double for married couples filing jointly. The tax applies to all income types including salary, RSU vesting, ISO exercises, and capital gains.

Can I avoid California tax by moving before my RSUs vest? Not entirely. California can source a portion of RSU income to the state based on the ratio of work-days performed in California during the vesting period. If you were granted RSUs while working in California, some of that income may be CA-taxable even if you move to another state before vesting. The earlier you move relative to your vesting dates, the smaller California's share.

Does California have AMT? Yes. California imposes a state-level Alternative Minimum Tax at a rate of 7%. Because California conforms to the federal ISO rules, the ISO bargain element is a California AMT preference item -- making large ISO exercises one of the most common triggers of California AMT, alongside large itemized deductions and other preference items.