California has introduced a major new tax benefit aimed at supporting retired military members and their surviving families. More than one million veterans in the state could benefit from a new rule that allows them to exclude up to $20,000 of certain military income from their California state taxes each year. This change is part of the 2025–2026 state budget and represents a big shift from past policy, where military retirement pay was fully taxed at the state level.

The update comes at the same time as a new consumer protection law designed to protect veterans from fraud when they apply for federal benefits. Together, these two changes are meant to provide both financial relief and stronger legal safeguards for those who served.

What the New Tax Benefit Means for Veterans

For the first time, California will allow retired service members to exclude a portion of their military retirement pay from state income taxes. The same benefit will also apply to families who receive income through the federal Survivor Benefit Plan, often called SBP. Eligible individuals can exclude up to $20,000 per year from their taxable state income.

This does not mean veterans receive a direct payment of $20,000. Instead, it reduces the amount of income that is subject to California state tax. Because taxes are calculated based on taxable income, lowering that number can reduce the total tax bill. The actual savings will depend on each person’s income level and tax situation, but for many households this could mean noticeable yearly savings.

In earlier years, California taxed all military retirement and SBP income without any special exclusion. Many other states already offered partial or full exemptions on military retirement pay, and veterans groups had long argued that California should follow that approach. With this new change, the state is moving closer to policies seen elsewhere in the country.

Who Can Qualify for the Exclusion

The tax exclusion is aimed at retired veterans who receive military retirement pay and surviving family members who receive Survivor Benefit Plan payments. The exclusion applies to tax year 2025 and later, under the current state budget rules.

California has a large military and veteran population. There are roughly 160,000 active-duty service members connected to the state and nearly 1.5 million veterans. Not all of them receive retirement pay, but a significant portion do, which is why estimates suggest that over one million people could benefit directly or indirectly from the change.

Families of deceased service members who receive SBP payments are also included, which expands the impact beyond just retirees and helps surviving spouses maintain more stable finances.

New Law Also Targets Fraud Against Veterans

Alongside the tax benefit, California has also passed a new law focused on protecting veterans from scams and unfair business practices related to benefits claims. Fraud targeting veterans has grown in recent years, especially from groups sometimes called “claim sharks” that charge large fees to help prepare federal benefit applications.

Under the new rules, only individuals with proper federal accreditation will be allowed to charge fees for preparing or assisting with veterans’ benefits claims. Unauthorized fees will be banned except where federal law clearly allows them. This is meant to stop companies or individuals from collecting money while providing little or no real help.

The law also expands state consumer protection rules so that they clearly cover services related to veterans’ benefits claims. This gives state authorities more power to investigate and take action against bad actors who try to exploit veterans and their families.

Financial Impact for Veteran Households

Supporters of the tax change say it could improve financial stability for many veteran households. Reducing taxable income by up to $20,000 each year can lower state tax bills and leave more money available for daily expenses such as housing, healthcare, utilities, and food.

There is also a broader economic goal behind the change. Some experts believe that offering better tax treatment for military retirement income can encourage retirees to remain in the state instead of moving elsewhere. States that fully exempt military retirement pay have sometimes attracted more veteran retirees. By adding this exclusion, California may become more competitive in retaining former service members and their families.

Keeping more veterans in the state can also have positive local economic effects, since retirement income is often spent within the community.

Other Tax Changes Affecting Americans

This California veteran tax benefit is arriving during a period of wider tax changes across the country. Several federal and state updates are affecting deductions, credits, and refund amounts for different income groups.

Recent federal adjustments have increased or expanded certain deductions, which may help middle-income and upper-middle-income households. Changes to the State and Local Tax deduction cap have also drawn attention, especially in higher-tax states. Homeowners and taxpayers with larger state and property tax bills may see different outcomes depending on how these rules apply to their returns.

There are also targeted tax provisions aimed at seniors and certain categories of workers, such as those who rely on tips or overtime pay. Because each tax situation is different, results can vary widely from one household to another.

What Veterans Should Do Next

Veterans and surviving family members who believe they qualify for the new California exclusion should keep clear records of their military retirement pay or SBP income for the tax year. When filing their California state tax return, they or their tax preparer can apply the exclusion according to state guidance once forms and instructions are finalized.

It may also be helpful to speak with a qualified tax professional who understands both federal and California tax rules. They can estimate how much the exclusion may reduce a tax bill and ensure it is claimed correctly.

Veterans seeking help with benefits claims should also make sure they work only with federally accredited representatives or organizations, especially under the new consumer protection law.

Disclaimer

This article is for general informational purposes only and is not legal or tax advice. Tax laws and benefit rules can change, and individual situations differ. Veterans and family members should consult a qualified tax professional or official state resources before making filing decisions or relying on any tax benefit.