California for retirees: Social Security untaxed, everything else taxed in full

Two rules decide a retiree’s California return. First, Social Security and railroad retirement benefits are not taxed, at any age and any income: whatever portion the IRS taxes is subtracted on Schedule CA (540), line 6b, column B, and California never sees it. Second, every other kind of retirement income is taxed in full. Private pensions, CalPERS and CalSTRS, federal civil service annuities, traditional IRA withdrawals, 401(k) and 403(b) distributions, inherited IRA withdrawals and Roth conversions all stay in California income and run through the nine brackets, 1% to 12.3%, plus the 1% surtax on taxable income over $1,000,000. There is no pension exclusion, no retirement income credit and no age test. The exceptions are narrow: up to $20,000 of military retirement pay, the same for a Survivor Benefit Plan annuity, and an extra $158 exemption credit for each spouse who is 65. For a retired couple of ordinary means the tax is modest, because the lower brackets are wide; for a couple drawing large IRA balances it is the highest state income tax in the country.

The Franchise Tax Board, the Department from here on, starts Form 540 from federal adjusted gross income. That is why the taxable part of Social Security has to be subtracted by hand on Schedule CA, and why the federal $6,000 senior deduction, which is taken below the AGI line, does nothing in California. Nothing is added back for it; it simply never arrives.

What is taxed and what is not

One basis wrinkle: California did not allow IRA deductions on the same schedule as the IRS before 1987, so a retiree who contributed in the early 1980s may have a California basis larger than the federal one. FTB Publication 1005, Worksheet I, recovers it tax-free. Few people still have those records, and the Department does not keep them for you.

The military exclusion, year two

For 2025 through 2029, a retiree may subtract up to $20,000 of uniformed-services retirement pay, and separately up to $20,000 of Department of Defense Survivor Benefit Plan annuity payments, on Schedule CA lines 5a and 5b. The condition is federal AGI of $125,000 or less, $250,000 on a joint return or for a surviving spouse; one dollar over and the whole exclusion is lost. The $20,000 is not indexed. A bill to raise it, SB 1407, was held in committee in August 2026 and did not pass. Before 2025 California taxed military retirement in full, so a 2024 return that showed it as taxable was right and a 2026 return that does the same is wrong.

What California gives seniors instead

Three small things on the return. The senior exemption credit, $158 for each spouse 65 or older by December 31, on top of the $158 personal credit; it comes straight off the tax. The senior head of household credit, 2% of taxable income up to $1,860 with an AGI limit of $98,652 (2025 figures; 2026 to come), for a filer 65 or older who qualified as head of household in one of the two prior years for a qualifying person who has since died; it is for the newly widowed parent or caregiver and is often overlooked in that first year alone. And the renter’s credit, $60 single or $120 joint, for renters with AGI of $55,830 or $111,660 or less. The dependent parent credit, 30% of net tax up to $610 (2025), helps a married filer who files separately and supports a parent in the parent’s own home.

Roth conversions: the arithmetic changes with the address

A conversion from a traditional IRA to a Roth is a distribution, and California taxes it the year it happens at the regular rates. For a retired couple in the 4% or 6% bracket that is a modest cost; for a couple whose conversion pushes taxable income past $150,394 it is 9.3% on every dollar above that line. Federally, the conversion also raises AGI, which can make more Social Security taxable and raise Medicare premiums two years later through IRMAA.

The address matters because of a federal law. Since 1996 no state may tax retirement income paid to someone who no longer lives there, and the Department applies it to IRA distributions, pensions and conversions alike: retirement income received after December 31, 1995 by a nonresident is not California income. A Californian who converts $300,000 in December and moves to Nevada in January pays California up to 9.3% or more on the conversion. The same person who moves in December and converts in January pays California nothing. For anyone planning to leave, the conversions belong on the far side of the move. The residency rules the Department applies are in Moving to California.

Withholding and estimates in retirement

Pension payers and IRA custodians will withhold California tax if asked, and the election is made on the payer’s form or on Form DE 4P; the federal W-4P alone does not set it. A retiree with a pension and a steady RMD can usually cover the state tax by withholding from one of them. Anyone who will owe $500 or more after withholding must make estimated payments on Form 540-ES, and California’s schedule is uneven: 30% by April 15, 40% by June 15, nothing in September, 30% by January 15. The safe harbor is 100% of last year’s tax, or 110% if last year’s California AGI was over $150,000. A large one-time event, a conversion, a sale of stock or a rental, is where retirees get caught, because nobody withholds on it and the June installment is the big one.

Property tax: relief at the assessor, not on Form 540

California has no property-tax credit, circuit breaker or rebate on the income tax return. The relief is in the property tax system itself, and most of it is Proposition 13: the tax is 1% of assessed value plus voter-approved bonds, and assessed value grows no more than 2% a year until the property changes hands. A retiree who bought in 1995 is paying tax on something close to the 1995 price. The programs below are claimed through the county assessor or the State Controller.

Proposition 19 cuts both ways. It freed people over 55 to move without losing their low assessment, and it ended the old rule that let children inherit a parent’s assessment on any property. A rental or a second home now reassesses to market value at the parent’s death. There is no California estate tax, inheritance tax or gift tax, so the reassessment is the main tax cost of passing on California real estate.