It reduces it from your AGI...NOT your wages, so in effect it doesn't see that money period for taxes. Go ahead and do a calfile. You will see unemployment benefits under income reductions/deductions.

It is a reduction of your AGI to an amount that CA taxes, and since it doesn't tax it it doesn't count towards your AGI

I filled out the sheets on calfile to their directions and was even on the phone with the franchise tax board and they assured me I was inputting it correctly.

Bassically on page 1 you put in your AGI
Page two you put in reductions and additions (unemployment and 1099-r's count as reductions)