Editorial note: This page is educational and is not legal, tax, or financial advice. California surtax rules, thresholds, and forms change year to year. Consult a California licensed CPA or tax attorney for the numbers and planning decisions that fit your specific facts before you file or make an estimated payment.
Last updated: August 13, 2026 · By Gold California Editorial
Quick answer: California imposes an extra 1 percent tax on the portion of a resident's taxable income above $1,000,000 under Revenue and Taxation Code Section 17043. The $1,000,000 threshold is not indexed for inflation and does not double for married or RDP joint filers. For retirees, the surtax most often shows up in a year with a large Roth conversion, an appreciated real estate sale, or a lump sum retirement distribution.
Short on time? The essentials
- Revenue and Taxation Code Section 17043 imposes a 1 percent additional tax on the portion of a taxpayer's taxable income above $1,000,000, effective for taxable years beginning on or after January 1, 2005.
- The surtax was added by Proposition 63 of November 2004 and funds county mental and behavioral health services.
- The $1,000,000 threshold is a fixed dollar amount. It is not indexed for inflation, and it does not double to $2,000,000 for a married or RDP joint return.
- The surtax is computed on Form 540 line 62 for 2024 returns, using the five-line worksheet in Section D of the Form 540 booklet.
- The Franchise Tax Board renamed the surtax the "Behavioral Health Services Tax" in the 2025 Form 540-ES instructions after Proposition 1 of March 2024 restructured the underlying state fund; the statutory basis in Section 17043 is unchanged.
- The surtax layers on top of the regular Section 17041 brackets and cannot be reduced by California credits under Section 17039.
- Social Security and Tier 1 Railroad Retirement benefits are excluded from California taxable income under Revenue and Taxation Code Section 17087, so they do not push a retiree toward the $1,000,000 line.
- Pension, 401(k), 403(b), 457(b), and traditional IRA distributions are California ordinary income to the extent deductible for federal purposes, per FTB Publication 1005.
- Nonresidents pay the 1 percent surtax on California source taxable income above $1,000,000 under the same rule; see FTB Publication 1100.
This page explains the California 1 percent Mental Health Services Tax for retirees who face a large one-year income event. It cites the statute and the current Franchise Tax Board form instructions on every figure. Nothing here is tax advice, and a California CPA should confirm the numbers for your specific facts before you file or send a payment.
The surtax is small in percentage terms and large in dollar terms once a taxpayer clears the threshold. A retiree who sells a longtime rental, converts a seven-figure IRA to a Roth, or takes a lump sum from a defined benefit plan can cross the line in one year while every prior year sat well below it.
What is the California Mental Health Services Tax
The Mental Health Services Tax is an additional 1 percent California personal income tax on the portion of a taxpayer's taxable income above $1,000,000. It is imposed by Revenue and Taxation Code Section 17043 and applies for taxable years beginning on or after January 1, 2005 (source: California Revenue and Taxation Code Section 17043).
The surtax was added by Proposition 63 of November 2, 2004, which the ballot titled the Mental Health Services Act. The measure directed the additional tax revenue to county mental health programs administered under the state Mental Health Services Fund.
Section 17043 sits on top of the regular Section 17041 income tax brackets. It applies to individuals, and it does not apply to entities. The full rule is a single line in the statute: 1 percent on the portion of taxable income above $1,000,000.
Two operational limits inside Section 17043 matter for planning. Under subsection (c)(1), the credit rules of Section 17039 do not apply to this tax, so California credits cannot reduce the surtax. Under subsection (c)(2), the filing-status recomputation of Section 17041 does not apply, so the $1,000,000 threshold does not shift for filing status.
When the 1 percent surtax hits a retiree
Most California retirees never touch the surtax in a normal year. Regular pension, Social Security, and IRA distribution income rarely exceeds $1,000,000 in California taxable income, and the surtax only applies to the portion above that line.
Three life events push a retiree across the line in a single year:
- A large Roth conversion. A California resident who converts a $1,500,000 traditional IRA balance in one calendar year adds $1,500,000 of ordinary California taxable income for that year. The Section 17043 surtax applies to the amount above $1,000,000.
- Sale of appreciated real estate or a closely held business. California treats long term capital gain as ordinary income at the regular Section 17041 brackets. A San Diego rental sold with a $1,300,000 recognized gain, on top of other pension and IRA income, may cross the line.
- A lump sum defined benefit distribution. A retiree who takes a full commuted lump sum from a private pension in one year has that entire amount counted as California ordinary income under FTB Publication 1005. A seven-figure lump sum triggers the surtax on the excess above $1,000,000.
Other triggers include the exercise of nonqualified stock options, a large deferred compensation payout at retirement, and a taxable sale of a founder's stock. The common thread is a single-year spike, not a steady stream.
Why the $1,000,000 threshold is a fixed number
Section 17043 states the threshold as a fixed dollar amount. It is not tied to the California inflation-adjustment mechanism that moves the regular income tax brackets each year under Section 17041.
The statute reads, in relevant part, that the surtax applies on "that portion of a taxpayer's taxable income in excess of one million dollars ($1,000,000)." No indexing clause is present.
The practical effect is drift. A $1,000,000 threshold set in 2005 has less real purchasing power in 2026 than it did when Proposition 63 passed. More California returns cross the line each year as nominal incomes and one-year events grow.
How the 1 percent surtax is computed on Form 540
The 2024 California Form 540 booklet includes a five-line worksheet in Section D for the Mental Health Services Tax. The output flows to Line 62 of Form 540 (source: FTB, 2024 Form 540 Booklet, Line 62 instructions).
The worksheet is straightforward. Start with taxable income from Form 540, line 19. Subtract $1,000,000. The result is the subtotal. Multiply the subtotal by 0.01. Enter the product on line 62 of Form 540. Whole dollars only.
| Step | Item | Amount |
|---|---|---|
| 1 | Taxable income from Form 540, line 19 | $ ___________ |
| 2 | Less threshold | $ (1,000,000) |
| 3 | Subtotal (line 1 minus line 2; if zero or less, no MHST due) | $ ___________ |
| 4 | Tax rate | 0.01 |
| 5 | Mental Health Services Tax (line 3 times line 4; enter on Form 540, line 62) | $ ___________ |
Source: FTB, 2024 California 540 Booklet, Line 62 instructions, checked August 2026 at ftb.ca.gov/forms/2024/2024-540-booklet.html.
The worksheet does not use the marginal bracket structure of Section 17041. It is a flat 1 percent on the excess above $1,000,000. A $1,000,001 taxable income produces $0.01 of surtax, rounded to zero. A $2,000,000 taxable income produces $10,000 of surtax.
A California resident aged 71 sells a longtime rental in Los Angeles in June 2025 and recognizes a $900,000 long term capital gain. Their other 2025 California taxable income totals $350,000 from pension, IRA, and interest income. Total California taxable income for 2025 is $1,250,000. Social Security is excluded from the California return under Section 17087.
The Mental Health Services Tax applies to the last $250,000, which is the amount above $1,000,000. The surtax equals $250,000 multiplied by 0.01, or $2,500. That $2,500 goes on Line 62 of Form 540 for 2025 in addition to the regular Section 17041 tax on the entire $1,250,000 of taxable income. A California CPA should confirm the specific bracket math, the depreciation recapture treatment, and any credits before the return is filed.
Behavioral Health Services Tax: the 2025 rename explained
The Franchise Tax Board renamed the surtax on its 2025 tax forms. The 2025 Instructions for Form 540-ES refer to a "Behavioral Health Services Tax (previously Mental Health Services Tax)" with the same $1,000,000 threshold and the same 1 percent rate (source: FTB, 2025 Instructions for Form 540-ES).
The rename follows Proposition 1 of March 2024, which California voters passed to restructure the underlying state fund. The measure renamed the Mental Health Services Act as the Behavioral Health Services Act. The statutory basis for the surtax under Revenue and Taxation Code Section 17043 was not repealed and continues to apply.
For tax preparation purposes, both names refer to the same 1 percent surtax on taxable income above $1,000,000. Older FTB publications, tax software help text, and CPA advisory notes still use the "Mental Health Services Tax" label. This page uses that label because it matches the statutory heading and Section 17043 language.
What retirement income counts toward the $1,000,000 line
The $1,000,000 threshold is measured against California taxable income, not federal taxable income and not gross income. The starting point is Form 540, line 19, after the Schedule CA (540) adjustments and the California standard or itemized deduction.
Included in California taxable income for the Section 17043 test:
- Traditional IRA and 401(k) distributions to the extent the contributions were federally deductible, per FTB Publication 1005.
- Roth conversion amounts in the year of the conversion.
- Private pension and annuity distributions.
- Lump sum defined benefit distributions.
- Long term capital gains from real estate, securities, and business sales, taxed at Section 17041 ordinary rates.
- Nonqualified deferred compensation payments and stock option income.
Not included in California taxable income for the Section 17043 test, per Revenue and Taxation Code Section 17087 and FTB Publication 1005:
- Social Security benefits. Section 17087(a) directs that Section 86 of the Internal Revenue Code does not apply for California purposes, so Social Security is excluded from California income (source: California Revenue and Taxation Code Section 17087).
- Tier 1 Railroad Retirement benefits, treated the same way by Section 17087.
- Qualified Roth IRA distributions that meet the federal five-year and age 59 and a half tests.
- Basis recovery on nondeductible IRA contributions, computed the same way as on federal Form 8606.
These distinctions matter for a retiree projecting whether a spike year will cross the line. Projecting Social Security as taxable California income can incorrectly push a projection over $1,000,000. The California return excludes it.
Filing status and the non-doubling of the threshold
Section 17043(c) rules out the filing-status recomputation of Section 17041 for the surtax. The result: the $1,000,000 threshold is the same for every filing status.
| Filing status | MHST threshold | Rate above threshold |
|---|---|---|
| Single | $1,000,000 | 1 percent |
| Married or RDP filing jointly | $1,000,000 | 1 percent |
| Married or RDP filing separately | $1,000,000 | 1 percent |
| Head of household | $1,000,000 | 1 percent |
| Qualifying surviving spouse or RDP | $1,000,000 | 1 percent |
Source: California Revenue and Taxation Code Section 17043(c)(2), which excludes the Section 17041 filing-status recomputation for the surtax. Checked August 2026 at leginfo.legislature.ca.gov.
The non-doubling result creates a planning quirk for a surviving spouse. A widow filing a final joint return with a large realized gain in the year of the spouse's death faces the same $1,000,000 threshold as a single filer, not $2,000,000. The regular Section 17041 brackets do double for joint filers; the Section 17043 surtax threshold does not.
The AMT and other California surtax rules follow a similar single-threshold pattern. The FTB Schedule P (540) instructions echo the same principle for the Alternative Minimum Tax exemption phaseout, though the phaseout figures differ from the flat MHST threshold.
Nonresidents and part-year residents
California applies the surtax to nonresident and part-year resident individuals who have California source taxable income above $1,000,000 during the taxable year. The 2025 Instructions for Form 540-ES restate the rule for the Behavioral Health Services Tax test using California source taxable income (source: FTB, 2025 Instructions for Form 540-ES, Section D).
The typical case for a retiree is the sale of California real estate after leaving the state. A former California resident who sells a Palm Springs vacation home for a $1,400,000 recognized gain has California source income above the threshold in the year of the sale.
Pension income sourced to prior California employment is generally not California source income for a nonresident, per the federal source rule in 4 U.S. Code Section 114. A retiree who left California and is drawing a CalPERS pension does not, in most cases, have California source income from the pension itself. Consult a CPA on the specific facts.
The 540-ES safe harbor in a spike year
A California taxpayer who expects taxable income above $1,000,000 must include the projected surtax on the Form 540-ES estimated tax worksheet. Section D of the 540-ES instructions carries a dedicated Behavioral Health Services Tax worksheet whose output flows to line 17 of the California Estimated Tax Worksheet.
Section C of the 540-ES instructions closes the prior-year prong of the safe harbor once current-year California AGI is $1,000,000 or more ($500,000 or more if married or RDP filing separately). In a spike year, only the 90 percent current-year figure is available (source: FTB, 2025 Instructions for Form 540-ES, Section C).
The California installment split for 2025 is 30 percent, 40 percent, 0 percent, and 30 percent, due April 15, June 16, September 15, and January 15, 2026. A retiree who projects a spike must include the surtax in the projected required annual payment and split it across those four due dates.
For the full estimated payment mechanics, see the sibling page on California Estimated Tax Payments for Retirees: Form 540-ES. Consult your CPA before you finalize any voucher amount.
How to project the surtax before a major transaction
The steps below outline how a California retiree walks through the surtax projection ahead of a large one-year event. They describe the general mechanics; they are not tax advice, and a California CPA should confirm each figure for your specific facts.
- List every 2025 California income item. Include projected pension, annuity, IRA, and 401(k) distributions. Include the recognized gain on any planned sale of real estate, business, or securities. Include any Roth conversion amount. Exclude Social Security and Tier 1 Railroad Retirement per Section 17087.
- Apply the Schedule CA (540) adjustments. Start with projected federal taxable income and apply the FTB Publication 1005 subtractions and additions. Get to a projected California adjusted gross income figure.
- Subtract the California deduction. Apply either the California standard deduction or the projected itemized deductions. The result is projected California taxable income for Form 540 line 19.
- Test the $1,000,000 line. If projected California taxable income is below $1,000,000, the Section 17043 surtax is zero. Skip the remaining steps.
- Compute the excess. If projected California taxable income is above $1,000,000, subtract $1,000,000. The result is the projected surtax base.
- Multiply by 0.01. The result is the projected 1 percent Mental Health Services Tax for line 62 of Form 540 (called the Behavioral Health Services Tax on 2025 forms).
- Add the surtax to the required annual payment. Include the projected surtax on line 17 of the 2025 California Estimated Tax Worksheet with the regular Section 17041 tax.
- Confirm the 540-ES safe harbor prong. If projected California AGI is $1,000,000 or more, only the 90 percent current-year prong is available. Use the smaller of 90 percent of the projected total tax or the applicable prior-year figure.
- Split the payment into California installments. Multiply the required annual payment by 30 percent for April 15, 40 percent for June 16, 0 percent for September, and 30 percent for January 15.
- Recompute if the transaction date shifts. Moving a sale or conversion from December to January shifts the surtax to a different tax year. A CPA can model both years side by side before you commit to a closing date.
Consult your CPA before you finalize the projection or a payment. A missed Schedule CA subtraction, a missed credit, or a misread of the $1,000,000 threshold can move a payment by thousands of dollars.
When this surtax does not apply
Most California retirement returns never touch the surtax. A few specific situations are worth flagging so a reader does not project the tax on a return that will not owe it.
- A retiree whose California taxable income stays below $1,000,000. The surtax is zero. There is no phaseout above a lower threshold and no partial application.
- A retiree whose only income is Social Security and Tier 1 Railroad Retirement. Both are excluded from California income under Section 17087. The California return likely has no taxable income at all.
- A retiree who spread a Roth conversion over multiple years. A $2,000,000 traditional IRA balance converted at $500,000 per year for four years generally stays below the $1,000,000 line each year, subject to other income.
- An installment sale of appreciated real estate. Reporting the gain under Internal Revenue Code Section 453 over multiple years spreads the recognized income out. A large gain reported on the installment method may stay under the line each year.
- A nonresident with no California source income above the threshold. Wages, pension, or investment income sourced outside California is not measured against the $1,000,000 line for that individual under Section 17043.
None of these situations replaces professional advice. A California CPA should confirm the specific numbers before you assume the surtax does not apply.
Mental Health Services Tax, answered
Is the California Mental Health Services Tax the same as the Behavioral Health Services Tax?
Yes. The 2025 Instructions for Form 540-ES refer to the "Behavioral Health Services Tax (previously Mental Health Services Tax)" with the same 1 percent rate and the same $1,000,000 threshold. The statutory basis in Revenue and Taxation Code Section 17043 was not changed by the 2024 rename; only the underlying state fund was restructured under Proposition 1 of March 2024.
Does the $1,000,000 threshold double for a married or RDP joint return?
No. Section 17043(c)(2) rules out the filing-status recomputation of Section 17041 for the surtax. A married or RDP couple filing jointly faces the same $1,000,000 threshold as a single filer. The regular Section 17041 income tax brackets do double for joint filers; the surtax threshold does not.
Is the $1,000,000 threshold adjusted for inflation each year?
No. Section 17043 states the threshold as a fixed dollar amount of $1,000,000. It is not tied to the California inflation-adjustment mechanism that moves the regular Section 17041 brackets each year. The nominal threshold has been the same since the tax took effect for taxable years beginning on or after January 1, 2005.
Does a Roth IRA conversion trigger the surtax?
It can, in the year of the conversion. The converted amount is California ordinary income to the extent it was federally deductible when contributed. If the conversion combined with other California income pushes taxable income above $1,000,000, the surtax applies to the amount above the line. Spreading a conversion over several years is one common way to stay below $1,000,000 in each year. Consult your CPA.
Are Social Security benefits included in the $1,000,000 calculation?
No. Revenue and Taxation Code Section 17087(a) directs that Section 86 of the Internal Revenue Code, which taxes Social Security at the federal level, does not apply for California. Social Security is excluded from California adjusted gross income and does not appear in Form 540 line 19. The same rule applies to Tier 1 Railroad Retirement.
Does a nonresident owe the California Mental Health Services Tax?
Only on California source taxable income above $1,000,000 during the taxable year. A former California resident who sells a California rental with a $1,400,000 gain typically has California source income above the threshold in the year of the sale. Pension income earned for prior California work is generally not California source under 4 U.S. Code Section 114. Consult your CPA.
Can California credits reduce the Mental Health Services Tax?
No. Section 17043(c)(1) directs that Section 17039, which allows California credits against the personal income tax, does not apply to this tax. The 1 percent surtax on income above $1,000,000 is computed after the regular Section 17041 tax and stands on its own on Form 540 line 62.
What line on Form 540 is the surtax reported on?
Line 62 for tax year 2024. The five-line worksheet in Section D of the 2024 Form 540 booklet computes the amount and enters it on that line. Software packages generally handle the computation automatically once total California taxable income on Form 540 line 19 crosses $1,000,000. Confirm the current-year line number in the FTB booklet for the tax year you are filing.
Sources
- California Revenue and Taxation Code Section 17043 (Mental Health Services Tax). Checked August 2026.
- California Revenue and Taxation Code Section 17087 (Social Security and Railroad Retirement Benefits). Checked August 2026.
- California Revenue and Taxation Code Section 17041 (Personal income tax rates). Checked August 2026.
- California Revenue and Taxation Code Section 17039 (Allowance of credits). Checked August 2026.
- FTB, 2024 California 540 Personal Income Tax Booklet, Line 62 Mental Health Services Tax. Checked August 2026.
- FTB, 2025 Instructions for Form 540-ES, Estimated Tax for Individuals (Behavioral Health Services Tax section). Checked August 2026.
- FTB Publication 1005, Pension and Annuity Guidelines, 2024. Checked August 2026.
- FTB, 2024 Instructions for Schedule P (540), Alternative Minimum Tax and Credit Limitations. Checked August 2026.
- IRS Publication 575, Pension and Annuity Income. Checked August 2026.
- IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Checked August 2026.
- 4 U.S. Code Section 114 (Limitation on state taxation of certain pension income), Cornell LII. Checked August 2026.
