High-Income Tax Planning in California: What Changes Above $1M in Income

Above $1 million of income, California adds a 1% Mental Health Services Tax on the excess, the federal state-and-local tax (SALT) deduction drops to its $10,000 floor, and the estimated-tax safe harbors you may have relied on get stricter. Several deductions also phase out, which makes entity structure, timing and income sourcing worth more than any single deduction.

This article is general information for business owners and high earners. Figures are for tax year 2026 unless noted; confirm current numbers before acting.

What does California add once income passes $1 million?

California taxes taxable income above $1 million at an extra 1%, on top of the 12.3% bracket. That produces the 13.3% top marginal rate people quote. The surcharge applies to income over $1 million whether you file single or joint, so couples do not get a doubled threshold.

California also has no preferential rate for long-term capital gains. A gain taxed at the federal long-term rate is taxed at ordinary state rates, so a large stock or business sale can land mostly in the top bracket. Our guide to California tax brackets shows how the brackets stack, and the California capital gains tax article covers the sale-year effect.

For scale, state tax on the first $1 million of taxable income alone is on the order of $100,000 for a single filer, and somewhat less for joint filers. Every dollar past that is taxed at 13.3%.

What changes on the federal side?

The federal changes at this level are mostly stacking surtaxes, not a new bracket.

• Top bracket. The 37% rate begins at $640,600 for single filers and $768,700 for joint filers in 2026, so $1 million of income is well inside it.
• Net investment income tax. The 3.8% NIIT applies to investment income once modified AGI passes $200,000 (single) or $250,000 (joint). Those thresholds are not indexed for inflation.
• Additional Medicare tax. An extra 0.9% applies to wages and self-employment income above the same thresholds.
• Alternative minimum tax. High earners with large state-tax or other preference items sometimes still owe it; see Form 6251 and who still owes AMT.

Starting in 2026, the value of itemized deductions is also capped at 35% for taxpayers who would otherwise be in the 37% bracket, and charitable gifts are subject to a 0.5%-of-AGI floor for itemizers. Both reduce the benefit of deductions at this income level.

Is the SALT deduction capped at $10,000 or $40,000?

At $1 million of income, the effective cap is $10,000. The 2025 federal law raised the SALT cap to $40,000 (adjusted upward slightly each year through 2029), but it phases the cap down for modified AGI above $500,000 until it reaches a $10,000 floor. A $1 million earner is past the phase-down, so California income tax and property tax mostly produce no federal benefit. How the SALT deduction works explains the mechanics.

Business owners have a workaround. California's elective pass-through entity tax lets an S-corp or partnership pay state tax at the entity level, where it is deductible against business income federally and not caught by the individual cap. The election has rules on timing, payment and credit, so decide it with your preparer before the first payment is due, not at filing.

Does the QBI deduction disappear above $1 million?

It depends on the business. The 20% qualified business income deduction is limited for owners of specified service trades or businesses (SSTBs) such as health, law, consulting and financial services, and it is gone for them once income clears the phase-in range. The 2025 law made the deduction permanent and widened that phase-in range, but at $1 million an SSTB owner is out either way.

Owners of non-service businesses keep the deduction, subject to limits tied to W-2 wages paid and the unadjusted basis of qualified property. That makes payroll and equipment ownership a planning input. Details are in the qualified business income deduction guide. California does not follow the federal QBI deduction at all.

How do estimated taxes work differently at this level?

California's due dates match the federal ones, but the installment split does not. California requires 30% of the annual payment in April, 40% in June, nothing in September and 30% in January, versus 25% each quarter federally. A planner who pays evenly can still trigger a state penalty.

The bigger change is the safe harbor. Federally, higher earners generally pay 110% of the prior year's tax to be protected. In California, filers with AGI of $1 million or more cannot use the prior-year safe harbor and must pay based on current-year tax. In a big-income year, that means estimating as you go. See California estimated tax payments and estimated tax penalties.

What planning moves still matter?

At this level, planning is mostly about timing, structure and character of income:

• Retirement contributions. The 2026 employee 401(k) deferral limit is $24,500, with catch-up amounts if you qualify. Owners can often add employer contributions or a cash-balance plan, which allows far larger deductions.
• Charitable giving. Appreciated stock given to a donor-advised fund is generally deductible at fair market value, but the deduction is capped at 30% of AGI, with a five-year carryforward for the excess. The 0.5% floor and 35% cap above apply too.
• Entity structure. S-corp and business tax planning affects self-employment tax, reasonable-salary exposure and whether the pass-through tax election is available.
• Timing a sale. Spreading gain through installment treatment, or planning before a transaction closes, can change which year absorbs the surtax. See tax planning before a liquidity event.

Does leaving California end the tax?

Not entirely. Stock option and RSU income is generally sourced to the workdays you spent in California between grant and vesting, so a move does not erase it. Deferred compensation is different: federal law (4 U.S.C. §114) bars states from taxing nonresidents on qualified retirement plan income, and the same protection covers nonqualified plans paid as substantially equal periodic payments over at least 10 years or for life. Other payouts depend on the plan terms. Residency is also examined closely; California's exit tax proposals and what leaving costs covers the practical risk.

What to do next

Start by projecting the current year's income and tax before September, since California's installment rules reward early estimates. If your income is irregular or tied to a sale, a mid-year review is worth more than a filing-season one. High incomes also draw more scrutiny, so keep documentation ready for an audit.

SBZ Tax works with business owners and high-income taxpayers nationwide, including entertainment, sports and public figures, and signs NDAs on request. You can read about our tax planning services, book a free consultation, call 818-748-2020, or visit the office at 190 Sierra Ct Ste 335, Palmdale, CA 93550. This is general information, not tax advice for your specific situation; talk to a qualified professional before acting.

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