Does California Tax Military Pay or Retirement?

California has established specific tax rules for military personnel that differentiate between active duty pay, spousal income, and retirement benefits. Understanding these distinctions is important for financial planning for service members who are either residents of California or are stationed within its borders. The tax implications vary based on residency status and the type of income received.

Tax Rules for California Residents

California provides a tax benefit to its resident service members on active duty. The state does not tax active duty military pay for members who are domiciled in California but are stationed outside the state under Permanent Change of Station (PCS) orders. For tax purposes, these individuals are treated as nonresidents. Domicile is your true, fixed, and permanent home, and the place to which you intend to return, regardless of where your military orders take you.

For example, a service member whose home of record is in San Diego but is stationed in Texas on PCS orders would not pay California income tax on their military earnings. This treatment acknowledges the transient nature of military service. However, this exemption is specific to active duty pay earned while stationed elsewhere; if a California-domiciled service member is stationed within California, their military pay is subject to state income tax.

For tax filing purposes, a resident stationed outside the state would file a nonresident return to exclude the active duty pay. The California Franchise Tax Board (FTB) provides guidance detailing various filing scenarios for military personnel. The service member’s domicile, not their temporary duty station, is the primary factor in this determination.

Tax Rules for Nonresidents Stationed in California

Federal law provides protections for nonresident service members in California on military orders. California does not tax the military pay of a service member who is domiciled in another state but is stationed in California. This rule ensures that service members are not required to change their tax home with each reassignment.

For instance, a service member who is a legal resident of Texas stationed at Travis Air Force Base will not have their military W-2 income subject to California income tax. This protection is rooted in the federal Servicemembers Civil Relief Act (SCRA). They would only be required to file a California tax return if they earned other income from California sources.

A nonresident service member with only military income does not need to file a California return. If they have other California-sourced income and need to file, they would use the California Nonresident or Part-Year Resident Income Tax Return. On this form, they can make an adjustment to subtract their active duty military pay.

Taxation of Spousal and Non-Military Income

The tax rules also extend to military spouses. Under the federal Military Spouses Residency Relief Act (MSRRA), a non-military spouse may avoid California income tax on their wages. To qualify, the spouse must be in California only because the service member is there on PCS orders, and both must have the same domicile in another state. This allows the spouse to maintain their residency for tax purposes in their home state.

To prevent state taxes from being withheld, an eligible spouse can provide their employer with a state withholding exemption form for military spouses. Employers may ask for documentation to verify eligibility, such as the spouse’s military ID card, the service member’s Leave and Earnings Statement (LES), and proof of shared out-of-state domicile.

A service member’s military pay exemption does not extend to other income they earn from California sources. This includes earnings from a part-time civilian job, income from a rental property located in California, or profits from a local business. This California-sourced income must be reported on a state tax return, regardless of the service member’s residency status.

California Taxation of Military Retirement Pay

Military retirement pay is treated differently than active duty pay in California. For California residents, all military retirement pay is considered taxable income. If a military retiree chooses to be a resident of California, their pension is subject to the state’s income tax rates.

This rule applies regardless of where the service member was stationed or domiciled during their active duty career. The taxability is based on the retiree’s residency status during the year they receive the retirement income. Nonresidents of California are not taxed on their military retirement pay, which aligns with federal law.

Unlike many other states, California has historically offered no exemptions for military retirement pay. A change is under consideration as of 2025, with a legislative proposal to create a partial exemption for military retirement income. If enacted, the change would exclude up to $20,000 of retirement pay for taxpayers below certain income limits. Retired military personnel planning to reside in California should monitor legislative developments that could affect their pension income.