Yes, California taxes military retirement pay as ordinary income. Starting with the 2025 tax year, though, qualifying residents can subtract up to $20,000 of military retired pay from their state taxable income, so the real question is whether you clear the income limits that unlock that exclusion. The relief is temporary, capped, and cuts off sharply above certain adjusted gross income thresholds.
The $20,000 Exclusion, and Who Actually Qualifies
Governor Newsom signed budget legislation in 2025 creating a partial exclusion for military retired pay covering tax years 2025 through 2029.1State of California Franchise Tax Board. Military Before that, California was the only state that taxed military retirement income without offering any exemption at all.2Legislative Analyst’s Office. The 2025-26 Budget: Partial Income Tax Exclusion for Military Retirement Income
If you are a California resident receiving federal military retired pay, you can subtract up to $20,000 of that pay from your state gross income each year. Department of Defense Survivor Benefit Plan annuities qualify too, but the combined exclusion for retired pay and SBP payments cannot exceed $20,000 total per tax year.1State of California Franchise Tax Board. Military
The income limits are the trap. Your federal adjusted gross income must fall below $125,000 if you file single, head of household, or married filing separately, or below $250,000 for joint filers and surviving spouses.3California Legislative Information. AB-2016 Personal Income Tax Law: Exclusions: Military Retirement Pay These are hard cliffs, not phase-outs. A single filer with an AGI of $125,001 loses the entire $20,000 exclusion. There is no partial benefit above the line.
The statute defines “uniformed services” broadly. It covers the five armed forces, the National Guard, and commissioned officers of the U.S. Public Health Service and NOAA. The law is set to be repealed on December 1, 2030, so unless the legislature extends it, the exclusion only applies to tax years 2025 through 2029.3California Legislative Information. AB-2016 Personal Income Tax Law: Exclusions: Military Retirement Pay
How to Claim It on Your California Return
Your California tax calculation starts from the federal adjusted gross income on your Form 1040, which already includes your military retirement pay. California conforms to that AGI figure, then requires state-specific adjustments on Schedule CA.4State of California Franchise Tax Board. 2025 Instructions for Schedule CA (540) California Adjustments – Residents
The military retirement exclusion is a state-only subtraction. Report it on Schedule CA (540), Part I, Section A, lines 5a and 5b, which cover pensions and annuities. Enter your full pension income in the federal column, then enter the excluded amount (up to $20,000) as a subtraction. That reduction flows through to your Form 540 and lowers your California taxable income.4State of California Franchise Tax Board. 2025 Instructions for Schedule CA (540) California Adjustments – Residents
Disability Pay Is Already Tax-Free
Before you calculate anything, separate your retired pay from your VA disability. VA disability compensation is completely exempt from both federal and California income tax. That includes disability pension payments and one-time disability severance payments tied to combat-related injuries. It is not included in gross income at all.5Internal Revenue Service. Veterans Tax Information and Services
Many retirees receive a mix of taxable retired pay and tax-free VA disability compensation. If you waived a portion of your retired pay in exchange for VA disability, only the remaining retired pay is subject to California income tax. Combat-Related Special Compensation follows the same pattern; because CRSC is treated as VA-type disability compensation federally, California does not tax it either.
The practical effect is that the $20,000 exclusion applies to what is left after disability is stripped out. Count only the taxable portion of your military retirement when you check yourself against the AGI thresholds and the $20,000 cap.
Residency Decides Whether California Can Tax You at All
If you are not a California resident, the state cannot tax your military pension. Military retirement pay is not California-source income.1State of California Franchise Tax Board. Military A retiree living in Nevada, Texas, or Florida owes California nothing on that pay no matter where they served.
Complications come from other California-source income. Rental income from California property, income from a California-based business, or gains from selling California real estate remain taxable regardless of where you live. If that income exceeds the filing thresholds, you file Form 540NR as a nonresident, but you still leave your military retirement pay out of the California calculation.6Franchise Tax Board. Instructions for Form 540NR Nonresident or Part-Year Resident Booklet
Being Stationed Here Is Not the Same as Living Here
Active-duty members on Permanent Change of Station orders to a California installation generally keep the domicile they held before arriving. Domicile is your true, permanent home, the place you intend to return to. The Franchise Tax Board weighs the whole picture: voter registration, driver’s license, vehicle registration, and where a spouse and dependents live, among other factors.
The problem tends to hit after separation. Once you are off active-duty orders, the servicemember protections fall away. If you stay in California after retirement, the FTB will treat you as a resident from that point forward, and your military pension becomes taxable (with the $20,000 exclusion available if you qualify). Changing your domicile after separation takes concrete steps: registering to vote in the new state, obtaining that state’s driver’s license, and physically relocating.
Part-Year Residents
If you moved into or out of California during the year, you pay tax on all income received while you were a resident, plus any California-source income earned during the non-resident period. Form 540NR and Schedule CA (540NR) separate income between the two periods. Military retirement pay received during your California resident months is taxable; pay received after you established residency elsewhere is not.6Franchise Tax Board. Instructions for Form 540NR Nonresident or Part-Year Resident Booklet
Spouses and the Military Spouses Residency Relief Act
The Military Spouses Residency Relief Act lets a civilian spouse keep a tax domicile outside California rather than becoming a California tax resident by virtue of being here on the service member’s orders. To qualify, you must not be the service member yourself, you must be legally married, you must live with your spouse in California, your spouse must have PCS orders to a California duty station, and your domicile must be outside California.1State of California Franchise Tax Board. Military
If you meet those conditions, your earned income is exempt from California personal income tax, though your wages remain subject to California unemployment insurance and state disability insurance withholding. File an updated Employee’s Withholding Allowance Certificate (DE 4) with your employer to stop California income tax withholding. If California income tax was withheld before you submitted the DE 4, claim that refund on your state tax return. The employer is not required to refund it directly.7Employment Development Department. Military Spouses Residency Relief Act
MSRRA protection ends when the service member separates or when the spouse establishes California as their own domicile. Couples filing jointly where one spouse is a California resident and the other claims non-resident status under MSRRA use Form 540NR.1State of California Franchise Tax Board. Military
Withholding and Estimated Payments
Military retirement pay does not have California state tax automatically withheld the way wages from a California employer do. If your withholding and credits will not cover your California liability, quarterly estimated payments on Form 540-ES may be required.
California requires estimated tax payments if you expect to owe at least $500 after subtracting withholding and credits, or $250 if married filing separately. You must pay either 90% of your current-year tax or 100% of your prior-year tax to avoid an underpayment penalty. The underpayment penalty rate is currently 7%.8Franchise Tax Board. 2026 Instructions for Form 540-ES Estimated Tax for Individuals
The simpler alternative is to ask the Defense Finance and Accounting Service to withhold California income tax directly from your retired pay. You can set this up through your myPay account, which eliminates the quarterly paperwork and reduces the risk of an underpayment penalty.
What Rate Applies to What’s Left
After the $20,000 exclusion (if you qualify) and any other adjustments, the remaining military retirement income is taxed at California’s regular progressive rates. Those rates start at 1% and climb through nine brackets. The top rate of 12.3% applies to income above roughly $743,000 for single filers, and an additional 1% Mental Health Services Tax surcharge kicks in on income over $1 million, bringing the effective top rate to 13.3%.9California Franchise Tax Board. 2025 California Tax Rate Schedules
Social Security helps on the other side of the ledger. California does not tax Social Security benefits at all. Even when part of your Social Security is taxable federally, you subtract the full amount on Schedule CA so none of it hits your California income.10Franchise Tax Board. Social Security For a retiree drawing military retired pay and Social Security together, only the pension side above the $20,000 exclusion falls into California’s brackets.