California Military Retirees: Claim Up to $20,000 Tax-Free in 2025

Did you know California is offering a new tax break for military retirees starting in 2025?

If you’re collecting military retirement pay — like a DFAS pension — and you live in California, you might be able to exclude up to $20,000 of that income from your California state taxes.

Veterans and qualifying military families can claim this exclusion when filing their 2025 California state income tax returns. 

Sound too good to be true?  We have checked this against multiple sources, because we also didn't believe it when we first heard about it.

Let’s walk through what’s changing, who qualifies, and how to figure out if this new benefit could put real money back in your pocket. 

What’s This All About?

In 2025, California is rolling out a brand-new state income tax exclusion for federal military retirement income. It applies to pensions from:

• The U.S. Armed Forces

• Army or Air National Guard (if you served under qualifying duty)

• U.S. Public Health Service Commissioned Corps

• NOAA Commissioned Officer Corps

And here’s something important: it doesn’t matter when you retired. You can qualify whether you retired last year or 20 years ago — as long as you meet the income limits and the pension is from a qualified source.

This exclusion runs from 2025 through 2029. That’s five years of potential savings. 

So How Much Could You Actually Save?

Let’s put it in real terms.

Say you’re receiving a $19,000 annual DFAS pension and you live in California. If your adjusted gross income (AGI) is under the state’s income limit, you may not pay a dime of state tax on that income.

Depending on your tax bracket, that could mean saving $1,000 or more each year.

Who Actually Qualifies?

Wondering if you’re eligible? Ask yourself these five questions:

1. Are you receiving military retirement pay (like a DFAS pension)?

2. Are you a California resident in 2025?

3. Is your AGI under the income limit for your filing status?

4. Are you filing as Single, MFJ, or Surviving Spouse (not MFS)?

5. Is your retirement income from a qualified federal source?

If you said “yes” to all of the above — good news. You likely qualify for the exclusion. 

What Are the Income Limits?

Here’s where things can get tricky. To qualify, your Adjusted Gross Income AGI needs to be below a certain threshold.

Ask yourself:

• Will your AGI be under $125,000 if you file Single?

• Under $250,000 if you file Married Filing Jointly or as a Surviving Spouse?

If your income stays below those limits, you could qualify for the full $20,000 exclusion.

And here's the catch: if you're even $1 over, you won’t get any exclusion. There’s no partial credit or phaseout — it's all or nothing. 

What If You’re Close to the Limit?

Let’s say your AGI is flirting with that $125K or $250K ceiling. Are there ways to bring it down?

Absolutely.

You could:

• Delay IRA withdrawals

• Make deductible contributions to a Traditional IRA or HSA

• Offset capital gains with losses

• Adjust how much income you take from retirement accounts

A little strategy could save you a lot — especially if it means qualifying for a full $20,000 tax exclusion. 

Final Thoughts: Should You Look Into This?

If you're a retired service member living in California and your income is under the limits, this is one of the best tax perks you’ll see in years. And it's available whether you retired last year or decades ago.

So, the real question is: Are you going to take advantage of it?

Now’s the time to look at your 2025 income projections, do a quick eligibility check, and start planning before the year ends.

Because if you are close to the limits and go over by just $1, this tax perk goes away!