California’s Behavioral Health Services Tax: Who Pays the Extra 1%?

California imposes an additional 1% tax on taxable income over $1,000,000. On the 2025 California resident income tax return, this tax is called the Behavioral Health Services Tax. It was previously known as the Mental Health Services Tax.

The revenue supports California behavioral health programs, including services for people with mental health conditions and substance use disorders.

What Is the Payment Threshold?

The tax applies only when your California taxable income exceeds $1,000,000.

Calculation:

(California taxable income − $1,000,000) × 1%

Important points:

• The first $1,000,000 of California taxable income is not subject to this additional tax.

• If taxable income is exactly $1,000,000 or less, no Behavioral Health Services Tax is due.

• The $1,000,000 threshold applies to each tax return and is not adjusted for filing status.

• The calculation is based on taxable income, not gross income, total sales proceeds, or federal adjusted gross income.

• It is added to the taxpayer’s regular California income tax and reported on Form 540.

• California tax credits generally do not reduce this additional tax.

What Types of Income Can Cause the Tax to Apply?

The tax is not limited to wages. Any item that increases California taxable income may contribute to crossing the threshold, including:

• Salary, bonuses, and business income

• Capital gains from selling stocks, a business, or real estate

• Partnership, S corporation, and rental income

• Taxable interest, dividends, and other investment income

For California residents, taxable income generally includes income from all sources, subject to California adjustments and deductions.

Example 1: Income Below the Threshold

Michael, a California resident filing as single, has $950,000 of California taxable income.

• California taxable income: $950,000

• Amount over $1,000,000: $0

• Additional tax: $0

Michael does not owe the Behavioral Health Services Tax because his taxable income does not exceed $1 million.

Example 2: Income Above the Threshold

David and Susan, California residents filing a joint return, have $1,300,000 of California taxable income after a large stock sale.

• California taxable income: $1,300,000

• Less the $1,000,000 threshold: $300,000

• $300,000 × 1%: $3,000

They owe an additional $3,000 Behavioral Health Services Tax, in addition to their regular California income tax.

Do You Need to Make Estimated Tax Payments?

The Behavioral Health Services Tax is included in your overall California tax liability; it is not paid through a separate annual tax return. A large bonus, business profit, or capital gain may create an estimated-tax requirement before the return is filed.

California generally requires individuals to make estimated payments when they expect to owe at least $500 after withholding and credits, or $250 if married/RDP filing separately. In addition, taxpayers with current-year California adjusted gross income of at least $1,000,000—or $500,000 if married/RDP filing separately—generally must base their required estimated payments on 90% of the current year’s tax rather than relying on the prior-year safe harbor.

Planning Tip

If you expect a major stock sale, business sale, unusually large bonus, or pass-through income allocation, contact us before completing the transaction when possible. The timing of income, deductible expenses, charitable giving, and estimated payments may materially affect the total tax and potential underpayment penalties.

Please contact Kaya Tax if you would like us to review whether this additional tax may apply to your situation or calculate the estimated payment needed.

Frequently Asked Questions

Is the additional 1% tax charged on all California taxable income?

No. The additional 1% tax applies only to the portion of California taxable income exceeding $1,000,000.

Does the $1 million threshold increase for married couples filing jointly?

No. The $1,000,000 threshold applies to each tax return and is not doubled for married couples filing jointly.

Is the tax based on gross income?

No. The calculation is based on California taxable income rather than gross income, total sales proceeds or federal adjusted gross income.

Can a large capital gain trigger the tax?

Yes. A large gain from selling stocks, real estate or a business may increase California taxable income above the $1,000,000 threshold.

Can partnership or S corporation income cause the tax to apply?

Yes. Income allocated from a partnership or S corporation may increase the owner’s California taxable income and contribute to crossing the threshold.

Is a separate tax return required for the Behavioral Health Services Tax?

No. The additional tax is included in the taxpayer’s overall California income tax liability and reported as part of the California personal income tax return.

Can California tax credits reduce this additional tax?

California tax credits generally do not reduce the Behavioral Health Services Tax. The treatment of a specific credit should be reviewed before relying on it.

Can a California nonresident owe this additional tax?

A nonresident may be subject to the additional tax if the individual’s California taxable income exceeds the applicable threshold. The calculation depends on the income taxable by California.

Does earning more than $1 million automatically mean the tax applies?

Not necessarily. The determining figure is California taxable income, not gross earnings, sales proceeds or federal adjusted gross income.

When should taxpayers begin planning for this tax?

Taxpayers should begin planning before a major sale, bonus or other significant income event whenever possible. Early planning provides more time to estimate the liability and determine whether additional estimated payments may be required.