California does not tax most pension income, but the rules depend on what kind of pension you receive and when you started collecting it.

California's tax code excludes may have access to pension and annuity income from state income tax. This means if you receive a pension from a government employer (federal, state, or local), a may have access to private pension plan, or a may have access to annuity, you will not owe California state income tax on that money. Federal income tax may still apply, but California itself does not tax it.

The key word is "may have access to." Not all retirement income qualifies for this exclusion. Income from IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs does not may have access to for the California pension exclusion, even though it may be tax-free at the federal level. Distributions from those accounts are taxable by California as ordinary income.

If you moved to California after you started receiving a pension from another state, you still do not owe California tax on that pension income. The exclusion applies regardless of where you were living when you began collecting.

Key Takeaways

  • Pensions from government employers and may have access to private pension plans are not taxed by California, even if you live there now.
  • IRA distributions, including Roth IRA withdrawals, are taxable as ordinary income in California and do not receive the pension exclusion.
  • The pension exclusion applies to the entire may have access to pension amount, with no income limit or phase-out.
  • You must report the pension income on your California tax return, but it will not result in state tax owed if it qualifies.

What counts as a may have access to pension in California

A may have access to pension is a retirement plan that meets specific federal tax code requirements. Most pensions from public employers—such as CalPERS, CalSTRS, county pension systems, and city pension systems—are may have access to pensions. Military retirement pay also qualifies.

Private employer pensions that meet federal qualification standards also may have access to for the California exclusion. These include defined-benefit plans and defined-contribution plans like 401(k)s, as long as they were set up and operated according to federal rules. If you receive a lump-sum distribution from a may have access to plan and roll it into an IRA, the money becomes IRA income and loses the pension exclusion.

Annuities purchased with after-tax dollars and structured as may have access to annuities also receive the exclusion. However, annuities purchased with pre-tax money or funded through an IRA do not may have access to.

Types of retirement income that California does tax

California taxes distributions from IRAs and Roth IRAs as ordinary income. This includes traditional IRA withdrawals, Roth IRA withdrawals (after age 59½), and required minimum distributions. The federal government does not tax Roth IRA withdrawals in retirement, but California does.

Income from self-employed retirement plans like SEP-IRAs and Solo 401(k)s is also taxable by California. Distributions from SIMPLE IRAs are taxable as well. These are treated as ordinary income and subject to California's income tax rates.

Social Security benefits are not taxed by California, though they may be taxed federally depending on your total income. Earnings from investments, rental income, and wages are all taxable by California regardless of your age or retirement status.

How to report pension income on your California tax return

You will receive a Form 1099-R from the pension plan administrator showing the amount you received during the tax year. This form will indicate whether the distribution is from a may have access to pension or an IRA. You must report this income on your California tax return even though most may have access to pension income is not taxed.

On your California Form 540 (the state income tax return), you report the pension income on the appropriate line. If the income qualifies for the pension exclusion, you subtract it from your taxable income. The California Franchise Tax Board provides a worksheet to calculate the exclusion if you have both may have access to pension income and non-may have access to retirement income.

Keep copies of your Form 1099-R and any pension plan statements showing the source of the income. If the California Franchise Tax Board questions your return, you will need to show that the income came from a may have access to source.

Pension income and other California tax credits

Even though may have access to pension income is not taxed, it still counts toward your total income for purposes of other California tax rules. For example, if you are over 65, you may be able to claim the Senior Head of Household credit or other age-based credits. Your total income, including non-taxable pension income, determines whether you meet the income limits for these credits.

Similarly, if you receive both may have access to pension income and IRA distributions, only the IRA portion is taxable. However, both amounts count when determining whether you owe tax on Social Security benefits or whether you may have access to for other income-based tax breaks.

What happens if you move out of California

If you were receiving a may have access to pension while living in California and then move to another state, California will not tax that pension income for any year you lived there. You will not owe back taxes to California on pension income you already received.

Your new state's tax treatment of pension income depends on that state's laws. Some states tax all retirement income. Others, like Texas and Florida, do not tax income at all. A few states have rules similar to California's. You should check the tax laws of your new state to understand what you will owe there.

Frequently Asked Questions

Do I have to file a California tax return if I only have pension income?

You must file if your income exceeds the filing threshold for your age and filing status, even if all your income is from a non-taxable pension. The threshold varies by year. You can find the current threshold on the California Franchise Tax Board website. Filing ensures you receive any credits you are due.

Are military pensions taxed by California?

No. Military retirement pay is treated as a may have access to pension and is not taxed by California. This applies to all military service members, whether active duty, reserve, or retired.

What if my pension plan is not may have access to under federal law?

If your pension plan does not meet federal qualification standards, the distributions are taxed by California as ordinary income. This is rare for government and large private employer pensions, but some small business or non-standard plans may not may have access to. Your Form 1099-R will indicate the type of plan.

Can I deduct my IRA contributions to reduce California taxes?

You cannot deduct traditional IRA contributions on your California return. California does not allow the federal IRA deduction. However, you do not pay California tax on the earnings inside the IRA until you withdraw them, just as at the federal level.

If I have both a pension and an IRA, how do I report both?

Report both on your California Form 540. The may have access to pension income goes on the pension line and is excluded from taxable income. The IRA distribution goes on the IRA line and is included in your taxable income. Use the California Franchise Tax Board worksheet if you have both types of income.