2026 Tax Brackets: Federal and California

The One Big Beautiful Bill Act made the seven-rate federal structure permanent, removing the scheduled 2026 reversion to pre-2018 rates that had shaped planning for years. California operates a separate system on top of it, with its own brackets, its own deductions, and — critically — its own conformity date that leaves it outside most of what OBBBA changed.

Below are the 2026 figures, what changed, and the divergences that matter for planning in Temecula, San Diego, Riverside, and San Bernardino.

Federal Rates for 2026

Seven brackets — 10%, 12%, 22%, 24%, 32%, 35%, and 37% — now permanent. Rates apply to taxable income, after deductions, and they are marginal: moving into a higher bracket increases the rate only on the income within that bracket, never on everything you earn. That misunderstanding costs people real money when they turn down income or defer a bonus for no reason.

Standard Deduction

Filing status	2026 standard deduction
Single	$16,100
Married filing jointly	$32,200
Head of household	$24,150

What OBBBA Changed

• Rates made permanent — no 2026 sunset to pre-TCJA brackets
• Child tax credit — $2,200 per qualifying child, refundable portion $1,700, now permanent and inflation-indexed
• SALT cap — raised to $40,400 for 2026 (from $40,000 in 2025), with a phasedown described below; reverts to $10,000 in 2030
• Tips and overtime — new temporary deductions for 2025 through 2028; tips capped at $25,000, overtime at $12,500 single / $25,000 joint, both phasing out at higher income
• Estate and gift exemption — $15 million per individual, permanent (see estate tax)
• Clean energy credits — most terminated; residential credits under Sections 25C and 25D ended after December 31, 2025

The SALT Cap Phasedown

The state and local tax deduction cap is the provision that matters most to high-income California filers, and its mechanics are widely misreported.

For 2026 the cap is $40,400 ($20,200 married filing separately). It is reduced by 30% of modified AGI above $505,000, but never below the $10,000 floor. A joint filer is fully phased down to the floor at roughly $606,333 of MAGI.

The result is a band of income — roughly $505,000 to $606,000 — where each additional dollar carries an unusually high effective marginal rate, because it simultaneously erodes the deduction. For California residents paying substantial state income and property tax, this band is worth modeling before accelerating income into a year, exercising options, or timing a bonus.

The 2030 reversion to $10,000 also means the current cap is a planning window, not a permanent state of affairs.

Other Thresholds That Move With the Brackets

Bracket tables get the attention, but several separate thresholds determine what a marginal dollar actually costs, and they do not all sit in the same place:

• Net investment income tax — 3.8% on investment income once modified AGI exceeds $200,000 single or $250,000 joint. These figures are not inflation-indexed and have not moved since 2013, so they reach further into the middle brackets every year.
• Additional Medicare tax — 0.9% on wages and self-employment income above the same $200,000 / $250,000 thresholds, also unindexed.
• Long-term capital gains brackets — 0%, 15%, and 20%, running on their own thresholds rather than the ordinary brackets. The 20% rate begins near $545,500 for a single filer in 2026.
• Alternative minimum tax — still in the Code with its own exemption and phaseout, and still relevant for taxpayers with large ISO exercises or unusual deduction patterns.
• Social Security wage base — indexed annually and separate from income tax brackets entirely, which is why self-employed taxpayers see marginal cost drop partway through the year.

Stacking these is what produces the effective marginal rates that surprise people. A California business owner in the SALT phasedown band can face an ordinary bracket, the phasedown erosion, the NIIT, the additional Medicare tax, and a 13.3% state rate on the same incremental dollar.

Marginal Rate Versus Effective Rate

Two numbers describe a tax situation and they are routinely confused.

Your marginal rate is what the next dollar costs. Your effective rate is total tax divided by total income, and it is always lower — sometimes dramatically so, because the early brackets and the standard deduction shelter a substantial portion of income before the top rate touches anything.

Use the marginal rate for decisions: whether to make a deductible contribution, accelerate a deduction, defer income, or convert a traditional retirement account to a Roth. Use the effective rate to understand the overall burden. Applying the marginal rate to the whole return overstates the tax by a wide margin, and it is the reason people occasionally decline income that would have left them better off.

California’s Separate System

California has its own progressive brackets, from 1% to 12.3%, plus the 1% mental health services tax on taxable income over $1 million — a 13.3% top marginal rate, the highest state income tax rate in the country.

Three structural differences matter:

No preferential capital gains rate. California taxes gains as ordinary income. Holding period is irrelevant on the state return. See capital gains.

A much smaller standard deduction. California’s is a fraction of the federal figure, so many taxpayers who take the federal standard deduction still itemize for California.

Different itemized deduction rules. California does not apply the federal SALT cap in the same way, and allows some deductions federal law limits or disallows.

Where California Does Not Follow OBBBA

California’s conformity date is January 1, 2025 under Senate Bill 711 — signed in October 2025 but fixed at a date preceding OBBBA’s July 2025 enactment. California therefore does not adopt OBBBA. The gaps that reach the most returns:

• Tips and overtime deductions — no California equivalent; both are fully taxable by the state
• Bonus depreciation — never adopted, and the permanent 100% restoration does not apply
• Section 179 — capped at $25,000 with a $200,000 phaseout, against $2.5 million federally
• Qualified business income — no California equivalent of the Section 199A deduction
• Qualified small business stock — no California exclusion; Section 1202 gain excluded federally is fully taxable by California
• Clean energy credits — California maintains its own separate incentives rather than conforming to the federal regime

Each produces a Schedule CA adjustment. Returns carrying federal figures onto the California return without the add-back create discrepancies the Franchise Tax Board can see, and discrepancies generate Notices of Proposed Assessment.

The Offset: Pass-Through Entity Elective Tax

California’s PTE elective tax was extended through 2030 by Senate Bill 132. A qualifying entity pays 9.3% at the entity level, generating a federal deduction that is not subject to the SALT cap, and the owner takes a credit against California tax.

For 2026 and later, missing the June 15 prepayment no longer voids the election, but it reduces the owner’s credit by 12.5% of the shortfall. For owners of S corporations and LLCs, this is frequently the largest single planning item on the return — and the most consequential deadline.

Frequently Asked Questions

What are the 2026 federal tax brackets?

Seven rates — 10%, 12%, 22%, 24%, 32%, 35%, and 37% — made permanent by OBBBA. Standard deductions are $16,100 single, $32,200 joint, and $24,150 head of household.

What is the SALT cap for 2026?

$40,400, reduced by 30% of modified AGI over $505,000 but never below $10,000. A joint filer reaches the floor at roughly $606,333 of MAGI. The cap reverts to $10,000 in 2030.

Does moving into a higher bracket increase tax on all my income?

No. Brackets are marginal — the higher rate applies only to income within that bracket. Earning more never reduces after-tax income through bracket movement alone.

Is California income tax really 13.3%?

That is the top marginal rate — 12.3% plus the 1% mental health services tax on taxable income over $1 million. It applies to the top slice of income, not to all of it.

Are tips and overtime tax-free now?

Not exactly. OBBBA created temporary federal deductions for 2025 through 2028, capped and income-phased, and both remain subject to FICA. California does not conform, so both are fully taxable by the state.

Why does my California return show different numbers than my federal return?

Because California’s conformity date precedes OBBBA. Bonus depreciation, Section 179 above $25,000, QBI, QSBS, and the tips and overtime deductions all require add-backs on Schedule CA.

When do 2027 figures come out?

The IRS typically releases annual inflation adjustments in October. Planning that depends on next year’s thresholds should wait for that release rather than rely on projections.

Plan Against Both Systems

Two rate structures, two conformity regimes, and a SALT phasedown band with an unusually high effective marginal rate — that combination makes California planning meaningfully harder than the federal figures alone suggest. Most of the value comes from decisions made before year end.

Pietro Canestrelli holds an LL.M. in Taxation and advises individuals and businesses on federal and California planning, entity structure, and examination defense. Schedule a consultation, or review our tax planning and corporate tax services.