Are Your Pensions Taxed in California?

If you are a California resident, your pension is generally subject to state income tax. California treats most retirement income, including distributions from pensions, 401(k)s, and traditional IRAs, as ordinary income. This means it is added to your other earnings and taxed at the state’s standard rates. This article covers how California taxes pension income, which benefits receive special treatment, how residency affects your tax obligations, and how to report this income to the Franchise Tax Board.

How California Taxes Pension Income

Pension income is subject to the state’s progressive tax system, which applies different tax rates to different portions of your income, with the rates increasing as income rises. For the 2025 tax year, these rates range from 1% to 12.3%, with an additional 1% mental health services tax on incomes exceeding $1 million.

The state’s tax brackets are adjusted annually for inflation. For a single filer, the first portion of their income is taxed at 1%, the next portion at 2%, and so on, through nine different brackets. For example, if a single individual has $50,000 in wage income and receives a $30,000 pension distribution, their total taxable income becomes $80,000. This method of taxation applies to both private and public pension payouts.

Tax Treatment of Specific Retirement Income

While most pension income is taxable in California, some retirement benefits have unique rules. California does not tax Social Security benefits, regardless of your total income. This differs from federal law, which may tax a portion of these benefits depending on your income level.

Railroad Retirement benefits are divided into two parts: Tier 1 and Tier 2. Tier 1 benefits are treated like Social Security and are not taxed by California. Tier 2 benefits are considered equivalent to a private pension and are subject to California’s income tax.

Beginning with the 2025 tax year, a portion of military retirement pay may be exempt from state tax. The exemption allows for up to $20,000 of military retirement pay to be excluded from income for retirees with an adjusted gross income (AGI) under $125,000 for single filers or $250,000 for joint filers. This exemption also extends to survivor benefit annuities. Pensions from other federal, state, and local government employment remain fully taxable if the recipient is a California resident.

The Role of Residency in Pension Taxation

A person’s residency status is a determining factor in how California taxes their pension income. If you are a California resident, you are taxed on all income, regardless of its source. This means that even if your pension was earned while working for a company in another state, your distributions are taxable by California once you become a resident.

Conversely, California cannot tax the retirement income of non-residents. This is due to a federal law which prohibits states from taxing the pension income of individuals who are no longer residents.

For instance, if an individual earns a pension from a California-based employer but establishes residency in a state like Nevada or Florida before they begin receiving distributions, California is barred from taxing that income. The right to tax the pension income belongs solely to the state where the individual resides at the time the income is received.

Reporting Pension Income to the Franchise Tax Board

When it comes time to file your state taxes, pension and annuity distributions are reported to you on federal Form 1099-R. You will use this form to report the income on your California Resident Income Tax Return, Form 540.

The taxable amount of your pension, as shown on your 1099-R, is generally transferred to the state return. If there are differences between federal and California taxable amounts, such as with Railroad Retirement benefits, you will make adjustments on Schedule CA (540). For instance, you would subtract the taxable portion of Tier 1 Railroad Retirement benefits reported on your federal return, as California does not tax this income.

Any California income tax withheld from your pension distributions will be listed in Box 14 of your Form 1099-R. This amount is then entered on the designated line for state withholding on Form 540, reducing your overall tax liability or contributing to a refund.