Exceptions for Married Taxpayers Who File a Joint Federal Income Tax Return – Generally, taxpayers who are required to file a California return and who file a joint federal return must also use the joint status on their California return. However, separate California returns may be filed if either spouse was:

California Source Income - California law is compatible with the federal Service Members Civil Relief Act, including treatment of service members’ military income. Service members domiciled outside of California and their spouses may exclude the member’s military compensation from gross income when computing the tax rate on non-military income. Service members domiciled in California must include their military pay in total income and must include it in California source income when stationed in California.

Permanent Change of Station - A service member stationed outside of CA on Permanent Change of Station orders ceases to be subject to CA income tax. A service member that is attached to a unit whose home is in CA, such as a ship home ported in CA or a unit based in CA is subject to CA income tax – even if the unit is temporarily deployed. File a 540NR, and pro-rate the income: the days in CA are subject to CA taxes, and the days after the transfer are not. Domicile does not change (FTB Pub 1032, Pg 5). For the definition of “permanent change of station” see “Moving Expenses” in the Federal section of this chapter.

Military Spouses’ Income – The federal Military Spouses Residency Relief Act (MSRRA) exempts personal service income and wages earned by taxpayers who reside with their military spouses at a duty station outside their state of legal residence from being taxed by the non-resident state or other tax jurisdiction. The couple must have relocated to California under military orders for the income to be exempt from California taxes. They must also share the same “domicile” or true home outside California where they intend to return and locate permanently. But see “Veterans Benefits and Transition Act of 2018,” below.

The act does not exempt nonmilitary income of military personnel. States cannot tax any military pay of non-resident military personnel. Both the military member stationed in California and accompanying spouse who are domiciled in another state will now be considered non-residents of California. As non-residents, interest, dividends and other intangible income is not taxed by California.

Veterans Benefits and Transition Act of 2018 – This legislation modifies the MSRRA rules to allow the spouse of a service member to make the election to use the same residence for purposes of taxation as the service member regardless of the date on which the marriage of the spouse and the service member occurred. This change also applies to California. Income of a service member’s spouse for services performed in California is not subject to tax if the spouse elects to use the same residence as the service member who is a non-resident of California. If the spouse makes the election, write “VBTA” at the top of the tax return in BLUE INK, or include it according to your software’s instructions. (2021 FTB Pub 1032, page 3)

Veterans Auto and Education Improvement Act of 2022 -  In the July 2023 issue of Tax News, the Franchise Tax Board has said that they were “in the process of reviewing” the Act and that the Act’s provisions automatically apply for California purposes. 

Domicile and Military - The state of domicile for a taxpayer serving in the military is generally the state where he or she was living when the taxpayer first entered military service.

Conformity to Military Family Tax Relief Act – California conforms to the following provisions:

Death Gratuity Exclusion - California permits an exclusion of federal death benefit gratuities and the rollover of military death gratuities to a Roth IRA or a Coverdell Education Savings Account. (R&TC §17160.5)

CA Death Gratuity Payment - CA law provides a $10,000 death gratuity payment to CA National Guard, State Military Reserve or Naval Militia members dying or killed in the line of duty if the legislature appropriates funds for the payments – non-taxable CA, if payment received 1/1/05 or later; taxable federal. (R&TC 17132.4)

DMV Penalty Waiver - The DMV will waive all penalties related to late payment of California vehicle registration renewal fees for members of the armed forces, armed forces reserve, and National Guard who are deployed outside California. “Deployed” means ordered to temporary military duty during a period when a presidential executive order specifies that the United States is engaged in combat or homeland defense. Penalty relief does not apply to:

Heroes Act of 2008 – CA conforms to the Heroes Act of 2008 with respect to the following issues:

Combat-Injured Veterans Tax Fairness Act 0f 2016 –  California does not conform to the special rules extending the statute of limitations for veterans who received disability severance payments after Jan. 17, 1991, that were erroneously included as income on their tax returns, and does not conform, or have the authority to allow, the use of standard refund amounts. However, Revenue and Taxation Code (R&TC) Section 19311 allows taxpayers to file a claim for refund with FTB within 2 years from the date of a final federal determination, which is defined in R&TC Section 18622 as the date the adjustment or resolution is “assessed” or posted to the taxpayers’ IRS account.

Therefore, in those instances where the normal California statute of limitation has closed, taxpayers who file these claims with the IRS may then file claims with FTB within 2 years after the claims are allowed by the IRS. This is true even if the taxpayer used the simplified method and claimed the standard refund amount shown in IR-2018-148, instead of filing an Amended U.S. Individual tax Return (1040-X), with the actual excluded amount.

For California purposes, though, claims must be based on the actual amount to be excluded and ideally a California Explanation of Amended Return Changes (Schedule X) will be filed with that information. However, under R&TC Section 19322, a taxpayer can file a refund claim in any format, as long as it is in writing, signed by the taxpayer or the taxpayer’s representative, and states the grounds of the claim, which in this case, is that they improperly included disability severance pay in income.

Taxpayers claiming a refund because of the Combat-Injured Veterans Tax Fairness Act of 2016 should follow FTB’s procedures for filing a general claim for refund. Additionally: