California’s new military retirement tax exemption lets qualifying residents exclude up to $20,000 of military retirement pay, or up to $20,000 of Survivor Benefit Plan annuity income, from state income tax starting with the 2025 tax year.1California Franchise Tax Board. 2025 FTB Publication 1032 – Tax Information for Military Personnel Governor Newsom signed the provision into law on June 27, 2025 as part of the budget package. The exclusion is partial, income-limited, and currently scheduled to end after the 2029 tax year.
Who Qualifies
Eligibility turns on the adjusted gross income reported on your federal return for the same year:2California Franchise Tax Board. Military Filing Information
- Single or head of household filers must have federal AGI of $125,000 or less.
- Married filing jointly or surviving spouse filers must have federal AGI of $250,000 or less.
These are cliffs, not phase-outs. One dollar over the limit and the exclusion disappears. The thresholds use federal AGI, so California-specific adjustments and deductions won’t bring you under the line if your federal number is above it.3California Legislative Information. California Senate Bill 1407 – Personal Income Tax Law Exclusions Military Retirement Pay Survivor Benefit Pay
The retirement pay exclusion and the Survivor Benefit Plan exclusion are two separate provisions in the Revenue and Taxation Code (Sections 17132.9 and 17132.10), but they share the same income limits.4My Army Benefits. California Military and Veterans Benefits You must also be a California resident; the exclusion is calculated on a California resident return.
What Pay Is Covered
The exclusion covers retirement pay from any of the uniformed services. That includes the Army, Navy, Air Force, Marines, Space Force, and Coast Guard, plus the commissioned corps of the U.S. Public Health Service and NOAA.1California Franchise Tax Board. 2025 FTB Publication 1032 – Tax Information for Military Personnel On the survivor side, it reaches annuities paid under SBP, the Reserve Component Survivor Benefit Plan (RCSBP), and the Retired Serviceman’s Family Protection Plan (RSFPP).4My Army Benefits. California Military and Veterans Benefits
Two important boundaries. VA disability compensation was never taxed by California in the first place, because federal law excludes disability payments for injuries or sickness from active service, and California conforms.5Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness4My Army Benefits. California Military and Veterans Benefits The new exclusion is irrelevant to that income. Combat-Related Special Compensation (CRSC) is likewise classified as disability pay and remains tax-free on its own terms.
Concurrent Retirement and Disability Pay (CRDP) is different. CRDP is treated as taxable military retirement pay federally and in California, which means the new $20,000 exclusion does apply to it.
How Much You’ll Actually Save
The dollar value depends on your California marginal tax bracket. Most retirees who qualify under the AGI limits will fall somewhere between the 6% and 9.3% brackets for 2025.6California Franchise Tax Board. 2025 California Tax Rate Schedules A full $20,000 exclusion at those rates works out to:
- $1,200 in annual savings at 6%.
- $1,600 at 8%.
- $1,860 at 9.3%.
If your military retirement pay is less than $20,000 per year, you exclude only what you actually receive. A retiree collecting $14,000 in the 8% bracket would save $1,120.
The 2029 Sunset
The exclusion applies to taxable years beginning on or after January 1, 2025 and before January 1, 2030. The 2029 tax year is the last one it covers unless the legislature extends it.4My Army Benefits. California Military and Veterans Benefits
A separate effort is already in motion to make the benefit larger and permanent. Senate Bill 1407, introduced in the 2025–2026 session, would strike the $20,000 cap and the income limits, converting the partial exclusion into a full exemption for all military retirement and Survivor Benefit Plan income regardless of the retiree’s income.3California Legislative Information. California Senate Bill 1407 – Personal Income Tax Law Exclusions Military Retirement Pay Survivor Benefit Pay Whether it clears appropriations is an open question.
Claiming the Exclusion
Your military retirement pay comes to you on IRS Form 1099-R from the Defense Finance and Accounting Service each January. The Franchise Tax Board directs qualified taxpayers to exclude up to $20,000 of that income when calculating California gross income for 2025.2California Franchise Tax Board. Military Filing Information FTB Publication 1032 carries the detailed instructions for military filers.1California Franchise Tax Board. 2025 FTB Publication 1032 – Tax Information for Military Personnel
For part-year residents, the exclusion applies only to the portion of retirement pay attributable to the period of California residency. If you moved out of state before 2025, you are not filing a California resident return and the exclusion doesn’t come into play.
A Note on Residency for Active-Duty Families
An active-duty service member stationed in California while maintaining legal residence in another state is generally not a California resident for income tax purposes. The Servicemembers Civil Relief Act prevents a state from taxing a service member’s pay solely because they are stationed there, and the Veterans Benefits and Transition Act of 2018 extends a similar election to military spouses for their own earnings. Those federal protections cover active-duty pay and spousal earnings. They do not reach retirement pay collected while a retiree voluntarily lives in California as a civilian after separation. If you retire and live in California, you are a California resident for this purpose, and the $20,000 exclusion is the rule that governs your retirement pay.