California’s military retirement tax exemption took effect with the 2025 tax year: qualifying retirees can now exclude up to $20,000 of military retirement pay, or up to $20,000 of Survivor Benefit Plan annuity income, from their California gross income. Governor Newsom signed the change into law on June 27, 2025 as part of the budget package, ending California’s status as the last income-tax state to fully tax military pensions. The exclusion is scheduled to sunset after the 2029 tax year unless the legislature extends it.
What Income the Exclusion Covers
Two parallel provisions sit in Revenue and Taxation Code Sections 17132.9 and 17132.10. One excludes up to $20,000 of military retirement pay; the other excludes up to $20,000 of annuity payments received under a Department of Defense Survivor Benefit Plan.1California Franchise Tax Board. 2025 FTB Publication 1032 – Tax Information for Military Personnel Coverage extends to SBP, the Reserve Component Survivor Benefit Plan (RCSBP), and the Retired Serviceman’s Family Protection Plan (RSFPP).2My Army Benefits. California Military and Veterans Benefits
Retirement pay from any uniformed service qualifies. That means the Army, Navy, Air Force, Marines, Space Force, and Coast Guard, plus the commissioned corps of the U.S. Public Health Service and NOAA.
If your annual retirement pay is less than $20,000, you exclude only what you actually receive. The $20,000 figure is a ceiling, not a floor.
Who Qualifies
Eligibility runs off your federal adjusted gross income for the same tax year:3California Franchise Tax Board. Military Filing Information
- Single or head of household: federal AGI cannot exceed $125,000.
- Married filing jointly or surviving spouse: federal AGI cannot exceed $250,000.
These are hard cutoffs. There is no phase-out. A single filer at $125,001 gets nothing. And because the test uses federal AGI, California-specific deductions cannot pull you under the limit.4California Legislative Information. California Senate Bill 1407 – Personal Income Tax Law Exclusions Military Retirement Pay Survivor Benefit Pay The same thresholds apply to both the retirement-pay exclusion and the SBP exclusion.2My Army Benefits. California Military and Veterans Benefits
What You’ll Actually Save
The dollar value depends on your California marginal rate. Most retirees who fit under the AGI limits land in the 6% to 9.3% brackets for 2025.5California Franchise Tax Board. 2025 California Tax Rate Schedules
- At 6%, a $20,000 exclusion saves $1,200 a year.
- At 8%, it saves $1,600.
- At 9.3%, it saves $1,860.
A retiree drawing $14,000 in annual retirement pay and taxed at 8% would save $1,120, because the exclusion caps at what you actually receive.
When the Exclusion Expires
The law applies to taxable years beginning on or after January 1, 2025 and before January 1, 2030. The 2029 tax year is the last one covered unless the legislature acts.2My Army Benefits. California Military and Veterans Benefits
Senate Bill 1407, introduced in the 2025–2026 session, would remove both the $20,000 cap and the AGI limits, turning the partial exclusion into a full exemption for all military retirement and SBP income regardless of the retiree’s other income.4California Legislative Information. California Senate Bill 1407 – Personal Income Tax Law Exclusions Military Retirement Pay Survivor Benefit Pay It has not become law.
VA Disability Pay Is a Separate Question
VA disability compensation is not military retirement pay. It has been tax-free at the federal level for decades under 26 U.S.C. § 104, and California conforms to that treatment.6Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness2My Army Benefits. California Military and Veterans Benefits Nothing about the new law changes that.
For retirees who receive both types of pay, the distinction controls what the exclusion touches. Combat-Related Special Compensation (CRSC) is classified as disability compensation and stays tax-free. Concurrent Retirement and Disability Pay (CRDP) is treated as taxable military retirement pay, so the $20,000 exclusion does apply to CRDP.
How to Claim It on Your California Return
Military retirement pay is reported on IRS Form 1099-R, issued each January by the Defense Finance and Accounting Service. The Franchise Tax Board’s guidance for 2025 directs qualified taxpayers to exclude up to $20,000 of that income when computing California gross income.3California Franchise Tax Board. Military Filing Information Detailed filing instructions are in FTB Publication 1032.1California Franchise Tax Board. 2025 FTB Publication 1032 – Tax Information for Military Personnel
If You Don’t Live in California
The exclusion is for California residents filing a California resident return. If you left California before 2025, it doesn’t reach you. For part-year residents, the exclusion applies only to retirement pay attributable to the period of California residency.
Active-duty service members stationed in California while maintaining legal residence elsewhere are generally not California residents for income tax purposes, under protections the Servicemembers Civil Relief Act provides. Those federal protections govern active-duty pay and, through the Veterans Benefits and Transition Act of 2018, certain spousal earnings. They do not govern retirement pay drawn by someone who has separated from service and settled in California as a civilian; in that situation, California residency controls, and the new $20,000 exclusion is the rule that matters.