What Are California’s Military Tax Exemptions?

California offers specific tax advantages to military personnel and their families, but the rules can be complex. The state’s tax treatment of military income depends heavily on a service member’s residency status, where their income is earned, and the specific type of military compensation they receive. These tax rules, governed by both state law and federal acts, create different outcomes for service members who claim California as their permanent home versus those stationed in the state temporarily.

Determining Your California Residency Status

Understanding your residency status is foundational to California’s military tax rules. The Franchise Tax Board (FTB) distinguishes between “residency” and “domicile.” Domicile is the place you consider your permanent home—the location you intend to return to after any absence. Factors that indicate your domicile include where you are registered to vote, hold a driver’s license, or maintain bank accounts.

A service member domiciled in California when joining the military generally remains a California domiciliary. However, their tax residency status can change. If a California-domiciled service member receives Permanent Change of Station (PCS) orders outside of California, they are considered a nonresident for that duration. They remain a resident if on a Temporary Duty (TDY) assignment outside the state.

A service member domiciled in another state but stationed in California on PCS orders is not considered a California resident for tax purposes. Their domicile remains their home state, a protection under federal law.

Tax Exemption for Active Duty Military Pay

The taxability of a service member’s active duty pay in California hinges on residency and domicile. For service members domiciled in California, their duty station location is the deciding factor. Pay earned while stationed outside California under PCS orders is exempt from state income tax. However, if stationed within California, their military pay is fully taxable.

A different set of rules applies to non-resident service members ordered to a duty station in California. Under the federal Servicemembers Civil Relief Act (SCRA), the active duty pay earned by a non-resident service member is not taxable by California. Their military income is reported to and taxed by their state of domicile.

This means a service member from Texas stationed at Camp Pendleton does not pay California income tax on their military salary. A California-domiciled service member at the same base, however, does pay state income tax on their salary.

Tax Rules for Other Military-Related Income

Beyond active duty pay, military personnel receive other income with its own tax rules. For retirees and survivors in the state, military retirement pay and Survivor Benefit Plan (SBP) payments are subject to state income tax. This income must be included in California gross income, though a proposal is under consideration for a partial exemption.

In contrast, military disability retirement pay is not taxable in California, following federal guidelines. Payments from the Department of Veterans Affairs (VA) for a disability are also tax-exempt. Any non-military income earned within the state, such as from a part-time job, is California-source income and is taxable regardless of residency status.

Tax Considerations for Military Spouses

Federal law provides tax protections for spouses of service members through the Military Spouses Residency Relief Act (MSRRA). This act allows a non-military spouse to avoid California income tax on wages if they meet three conditions:

• The service member must be present in California in compliance with military orders.
• The spouse must be in California solely to live with the service member.
• The spouse must maintain the same domicile as the service member.

If all conditions are met, the spouse’s income from wages or self-employment is not subject to state tax. To prevent withholding, the spouse should provide their employer with a California Employee’s Withholding Allowance Certificate (DE 4). This protection only applies to income from services performed, as income from other California sources, like owning a rental property, remains taxable.

California Filing Requirements

California residents for the entire year file Form 540, the California Resident Income Tax Return. Non-residents and part-year residents, including California-domiciled service members stationed outside the state, file Form 540NR, the California Nonresident or Part-Year Resident Income Tax Return.

A California resident with tax-exempt military pay earned while stationed outside the state subtracts that income on Schedule CA (540), California Adjustments. A non-resident service member in California does not include their active duty pay as California-source income on the Form 540NR. A qualifying military spouse also does not report their exempt wages.

For comprehensive instructions and specific scenarios, military personnel should consult FTB Pub. 1032, “Tax Information for Military Personnel.” This publication and the necessary forms are available on the Franchise Tax Board’s website.