Federal law and California law work together to determine where a servicemember and spouse are taxed. The answer depends mainly on the servicemember’s domicile and duty station, not simply on where the family happens to be living. The Franchise Tax Board (FTB) explains the California rules in Publication 1032, Tax Information for Military Personnel.
The Federal Framework
The federal Servicemembers Civil Relief Act (SCRA) generally prevents military orders alone from changing a servicemember’s state of residence for tax purposes. As the FTB summarizes it, under the SCRA, servicemembers who are not domiciled in California are not taxed by California on pay received for military services performed in California.
Servicemembers Domiciled in California
Stationed in California. According to Publication 1032, servicemembers whose domicile is California are residents of California and are subject to tax on all income, regardless of source, while stationed in California.
Stationed outside California. Publication 1032 explains that California servicemembers who leave California under permanent change of station (PCS) orders become nonresidents for California income tax purposes. After departure, only income from California sources is taxed by California, and military pay is not California-source income when the servicemember is permanently stationed outside California.
This is an important point that is often misstated: a California-domiciled servicemember on PCS orders outside the state is not taxed by California on military pay, even though California remains the servicemember’s domicile.
Servicemembers Domiciled Elsewhere and Stationed in California
A servicemember domiciled in another state who is stationed in California is not taxed by California on military pay. California can tax that servicemember’s California-source nonmilitary income, such as wages from civilian work performed in California or rent from California property. When computing the California tax rate on that nonmilitary income, the servicemember excludes military compensation from total income.
Military Spouses
Federal law also protects military spouses. The FTB’s Form 540NR instructions explain that a spouse of a servicemember neither loses nor acquires a residence or domicile for tax purposes by being absent from or present in a jurisdiction solely to be with the servicemember in compliance with military orders.
Publication 1032 explains that, under the Veterans Auto and Education Improvement Act (VAEIA), a spouse may elect to use one of three residences for state tax purposes: the residence or domicile of the servicemember, the residence or domicile of the spouse, or the permanent duty station of the servicemember. Publication 1032 also explains how to claim this treatment on a California return.
The servicemember’s protections and the spouse’s protections are related but separate. Each spouse’s residency should be analyzed on its own, using the rules that apply to that spouse.
Filing Status
California generally requires the same filing status used on the federal return. Publication 1032 explains an exception: active duty servicemembers and their spouses who file a joint federal return may file joint or separate California returns (see also Revenue and Taxation Code § 18521).
Combat Zones
Publication 1032 explains that a servicemember who was in a designated combat zone, contingency operation, or qualified hazardous duty area is entitled to an extension to file and pay California tax, without interest and penalties, of up to 180 days after leaving the area. California’s treatment of military pay does not always follow federal law; for example, Publication 1032 notes that California does not conform to the federal exclusion for military pay received while serving in Egypt’s Sinai Peninsula.
Military Retirement Pay
California has a new, temporary exclusion for military retirement pay. For taxable years beginning on or after January 1, 2025, and before January 1, 2030, a qualified taxpayer may exclude up to $20,000 of retirement pay received from the federal government for service in the uniformed services, if federal adjusted gross income does not exceed $125,000, or $250,000 for spouses filing a joint return or a surviving spouse.
After Service Ends
When military service ends, the general residency rules apply. A veteran who establishes a permanent home in another state is evaluated under the same domicile and closest-connection factors that apply to everyone else, as described in FTB Publication 1031.
The Bottom Line
Military residency for California tax purposes turns on domicile and duty station. California-domiciled servicemembers stationed in California are taxed on all income; those who leave on PCS orders are treated as nonresidents and are not taxed on military pay; servicemembers domiciled elsewhere are not taxed on military pay earned in California. Spouses have separate protections and an election under federal law.
Questions about military residency and California tax?
Tax attorney Cassra Minai, Esq. can review your situation in a confidential consultation.