Does California Tax Military Retirement?

The tax obligations for military retirees are a frequent source of questions for those considering California as their home after service. The state’s treatment of military-related income depends on the type of income received and the legal residency status of the retiree.

California’s Tax Treatment of Military Retirement Pay

Currently, California taxes military retirement pay. The California Franchise Tax Board (FTB) treats military pensions as regular, taxable income for residents. If you are a California resident, the retirement pay you receive is subject to the state’s income tax rates, similar to a pension from a private-sector company. This is different from most other states, which offer at least a partial exemption for this income.

A proposal in the governor’s 2025-26 state budget aims to change this. If enacted, this measure would exempt up to $20,000 of military retirement pay from state income tax, starting with the 2025 tax year. The proposed exemption would be available to taxpayers with an adjusted gross income below $125,000 for single filers and $250,000 for joint filers.

Taxability of Other Military-Related Income

Retirees often receive other forms of compensation with distinct tax treatments. Payments from the Survivor Benefit Plan (SBP) are currently considered taxable income in California. The governor’s 2025-26 budget proposal also includes SBP annuities, which would be subject to the same exemption and income limitations as military retirement pay.

In contrast, disability compensation from the U.S. Department of Veterans Affairs (VA) is not taxable. California follows federal law, meaning any payments for a service-connected disability are exempt from both federal and state income tax. Additionally, active duty or reserve pay earned while a California resident and stationed within the state is fully taxable.

Determining California Residency for Tax Purposes

California’s tax laws apply based on an individual’s residency status. The FTB defines a resident as someone in the state for other than a temporary purpose, or someone domiciled in California but temporarily outside the state. Domicile is the one place you consider your true, permanent home and to which you intend to return whenever you are away.

The FTB examines numerous factors to determine where you have the closest connections. These ties include:

• The location of your spouse and children
• The state that issued your driver’s license
• Where your vehicles are registered
• Where you are registered to vote
• The location of your bank accounts, doctors, and professional licenses

No single factor is decisive; the FTB weighs the strength of all connections to make a determination.

A full-year resident is taxed on all income from all sources. A nonresident is taxed only on income from California sources. A part-year resident, who moves into or out of the state, is taxed on all income while a resident and only on California-source income while a nonresident.

Reporting on Your California Tax Return

Reporting military income on a California tax return begins with your federal Adjusted Gross Income (AGI). Since military retirement pay is currently taxable, it is included in the federal AGI that you transfer to your California Resident Income Tax Return (Form 540) and becomes part of your California taxable income.

Should the law change to create an exemption, the process would be different. Taxpayers would report their full federal AGI on Form 540 and then subtract the exempt portion of their military retirement pay on Schedule CA (540), “California Adjustments.” This form is used to report differences between federal and state law, and the subtraction would be made on the line for “Other Income.”