Accurately predicting terrestrial carbon (C) and nitrogen (N) storage requires understanding how plant invasions alter cycling and storage. A common, highly successful type of plant invasion occurs when the invasive species is of a distinctly different functional type than the native dominant plant, such as shrub encroachment throughout the western United States and annual grass invasions in Mediterranean shrublands, as studied here. Such invasions can dramatically transform landscapes and have large potential to alter C and N cycling by influencing storage in multiple pools. We used a manipulation of non-native annual grass litter within a shrub-dominated habitat in southern California (coastal sage scrub, CSS) to study how grass invasion alters ecosystem C and N storage. We added, removed, or left unchanged grass litter in areas of high and low invasion, then followed soil and vegetation changes. Grass litter greatly increased C and N storage in soil, aboveground native and non-native biomass. Aboveground litter storage increased due to the greater inputs and slower decomposition of grass litter relative to shrub litter; shading by grass litter further reduced decomposition of both non-native and native litter, which may be due to reduced photodegradation. Soil C and N pools in areas of high litter increased ∼20% relative to low litter areas in the two years following manipulation and were generally sinks for C and N, while areas with low litter were sources. We synthesize our results into a C cycle of invaded and uninvaded areas of CSS and link changes in storage to increases in the soil fungi : bacteria ratio, increased plant inputs, and decreased litter loss. Overall, we show that grasses, especially through their litter, control important abiotic and biotic mechanisms governing C and N storage, with widespread implications for C sequestration and N storage in semiarid systems undergoing grass or shrub invasions.