New 2026 Tax Law Changes for Californians (OBBBA)

What the One Big Beautiful Bill Act (OBBBA) Changed for 2026

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025 (Public Law 119-21). It is the most significant federal tax legislation since the Tax Cuts and Jobs Act of 2017. The OBBBA permanently extended the core TCJA provisions that were set to expire and added several new provisions that directly affect California taxpayers. Here is what changed — and what stayed the same.

SALT Cap Raised to $40,000 — What It Means for California Taxpayers

The OBBBA raised the SALT deduction cap from $10,000 to $40,000 for tax years 2025 through 2029. This is a major change for California taxpayers who itemize deductions. Under the old $10,000 cap, a California homeowner paying $60,000 in state income tax and $20,000 in property taxes could only deduct $10,000 federally — losing $70,000 in deductions. Under the new $40,000 cap, that same taxpayer can now deduct $40,000 — recovering $30,000 in previously lost deductions and saving approximately $11,100 in federal tax at the 37% rate.

The phase-out: The $40,000 cap phases down for high-income taxpayers. For taxpayers with modified adjusted gross income (MAGI) over $500,000, the cap reduces by 30 cents for every dollar of income above $500,000, bottoming out at $10,000. A taxpayer with $600,000 MAGI would have a SALT cap of $10,000 ($40,000 - 30% × $100,000 = $10,000).

The PTET election remains valuable even with the higher SALT cap. For California S Corp and partnership owners whose income exceeds $500,000 — where the SALT cap phases back to $10,000 — the PTET election is still the primary way to deduct California income tax at the entity level, bypassing the SALT cap entirely. KDA evaluates the PTET election for every eligible client.

100% Bonus Depreciation Restored — Federal Only

The OBBBA restored 100% federal bonus depreciation (IRC Section 168(k)) for qualifying business property placed in service after January 19, 2025. Under the TCJA, bonus depreciation was phasing out: 80% in 2023, 60% in 2024, 40% in 2025. The OBBBA reversed that phase-out and made 100% immediate expensing permanent for most qualifying assets.

What qualifies: New and used tangible personal property with a recovery period of 20 years or less — equipment, machinery, computers, vehicles (subject to luxury auto limits), and qualified improvement property. Real property itself does not qualify, but cost segregation studies can reclassify portions of a building into shorter-life components that do qualify.

California does not conform. California has never allowed bonus depreciation. On your California return, you must depreciate assets using MACRS over their standard recovery periods. This creates a permanent difference between your federal and California taxable income that must be tracked and reconciled every year. A California business that claims $500,000 in federal bonus depreciation will have $500,000 more in California taxable income in year one — a California tax bill of up to $66,500 at the 13.3% rate.

No Tax on Tips & No Tax on Overtime — New for 2025-2028

The OBBBA created two new above-the-line deductions that reduce federal taxable income for workers in tipped occupations and for employees who receive overtime pay. Both provisions apply to tax years 2025 through 2028.

No Tax on Tips: Employees and self-employed individuals in qualifying tipped occupations (food service, hospitality, beauty services, and similar industries) can deduct qualified tips from federal taxable income. The deduction is above-the-line, meaning you do not need to itemize to claim it. Tips must be voluntarily given by customers — mandatory service charges do not qualify. The deduction phases out for taxpayers with income above $150,000 ($300,000 MFJ).

No Tax on Overtime: Employees who receive qualified overtime compensation can deduct the overtime pay that exceeds their regular rate. The maximum annual deduction is $12,500 ($25,000 for joint filers). The deduction phases out for taxpayers with income above $150,000 ($300,000 MFJ).

California does not conform to either provision. Both deductions are federal-only. Tips and overtime remain fully taxable on your California return at up to 13.3%.

2026 Federal Tax Brackets

California Tax Rules for 2026 — What Did NOT Change

California operates on its own tax code and does not automatically adopt federal changes. For 2026, California's tax rules are largely unchanged from prior years. The top marginal rate remains 13.3% for income over $1 million. The Mental Health Services Tax (1% surcharge) continues to apply to income over $1 million. California's SDI rate for 2026 is 1.1% with no wage base cap.

California's non-conformity items remain in full effect: no bonus depreciation, no QBI deduction, no HSA deduction, no tip income deduction, no overtime income deduction. The SALT cap increase to $40,000 is a federal change only — your California return still allows a full deduction for California income taxes paid (since California does not cap its own SALT deduction). The $800 annual LLC franchise tax and gross receipts fees remain unchanged.

2026 Tax Planning Strategies for California Taxpayers

The OBBBA creates new planning opportunities but also new complexity for California taxpayers. Here are the highest-impact strategies for 2026:

Re-evaluate itemizing vs standard deduction. With the SALT cap now at $40,000, many California homeowners who were previously taking the standard deduction may now benefit from itemizing. If your mortgage interest + property taxes + state income taxes exceed $31,500 (MFJ standard deduction), you should itemize. Run the calculation — the math has changed significantly.

Maximize federal bonus depreciation before California divergence creates a cash flow problem. If you are purchasing equipment or doing a cost segregation study, the federal 100% deduction is now permanent. But plan for the California tax bill — you will owe California tax on the income you deferred federally. KDA models both the federal and California impact before recommending any large depreciation strategy.

PTET election remains essential for high earners. If your income exceeds $500,000, the SALT cap phases back to $10,000 and the PTET election is still the primary way to deduct California income tax at the entity level. For incomes between $200,000 and $500,000, evaluate whether the $40,000 SALT cap now makes itemizing more valuable than the PTET election — the answer depends on your specific situation.

Restaurant, hospitality, and service business owners: Evaluate the tip income deduction for your employees. While California does not conform, the federal deduction can still meaningfully reduce your employees' federal tax burden — which matters for retention and compensation planning.

For personalized 2026 tax planning, see KDA's Business Owners page or book a consultation to review your specific situation.