1. Social Security Benefits — The Big One

California fully exempts Social Security benefits from state income tax. Every dollar of Social Security you receive — whether it’s retirement benefits, survivor benefits, or disability benefits — is subtracted on Schedule CA. This is the single largest subtraction for most retirees.

At the federal level, up to 85% of your Social Security can be taxable depending on your provisional income. A married couple with $40,000 in Social Security and $50,000 in other income might pay federal tax on $34,000 of those benefits. California? Zero. The entire $40,000 comes off.

This makes California more generous than most people realize for Social Security purposes. New York does the same thing — full exemption. But states like Colorado, Connecticut, and Montana only partially exempt Social Security. And states like Minnesota tax it pretty aggressively. The California exemption isn’t means-tested either: whether you make $30,000 or $3,000,000 in other income, your Social Security is still fully exempt from California tax.

Why This Matters for Retirement Planning

The Social Security subtraction changes the math on whether to retire in California. People fixate on California’s high income tax rates (up to 13.3%), but if a big chunk of your retirement income is Social Security, your effective California tax rate is lower than the headline number suggests. A retiree collecting $36,000 in Social Security and $40,000 from a pension pays California tax on only $40,000. That’s a 5.28% effective rate in 2025 — not exactly the punishing rate people imagine.

2. California Lottery Winnings

Here’s a subtraction that surprises people: California doesn’t tax California Lottery winnings. If you win $10,000 on a Scratchers ticket or hit a $1 million Mega Millions jackpot purchased in California, that income is exempt from state tax.

But — and this is where people get tripped up — the exemption applies only to the California Lottery specifically. If you bought a Powerball ticket in Nevada, or won a prize from another state’s lottery, that income is taxable on your California return. The subtraction only covers prizes from tickets issued by the California State Lottery itself.

The federal government still taxes all lottery winnings regardless of which state issued them. So you’ll have the winnings on your federal return (1040), flowing into your federal AGI on Form 540 Line 13, and then you subtract the California Lottery portion on Schedule CA.

One counterintuitive angle: this exemption means a big California Lottery win actually pushes your California AGI lower relative to federal, potentially qualifying you for income-based credits like the renter’s credit that you wouldn’t get based on federal AGI alone. Not a common scenario, but it’s technically possible.

3. Active-Duty Military Pay Earned Outside California

Active-duty military members stationed outside California don’t owe California tax on their military compensation, even if they’re California residents. This falls under the federal Servicemembers Civil Relief Act (SCRA), but California also has its own provisions codified in state law.

The subtraction applies specifically to active-duty military pay — not to a military spouse’s civilian income earned in the same state, and not to investment income. A California-resident soldier stationed at Fort Liberty in North Carolina subtracts their military wages on Schedule CA. But their rental income from a California property? Still taxable. Their spouse’s civilian job at a North Carolina employer? That depends on the Military Spouses Residency Relief Act (MSRRA) and whether the spouse claims California or another state as their state of legal residence.

Reserve and National Guard pay for weekend drills and annual training doesn’t qualify for this subtraction unless you’re activated to full-time active duty. The distinction between active duty and reserve status matters enormously here.

4. Disaster Relief Payments

California has experienced more than its share of natural disasters. Wildfire relief payments, FEMA assistance, and certain insurance proceeds related to federally declared disasters may be excluded from California income, even if they’re partially taxable federally.

California also periodically passes specific legislation to exclude disaster-related income. After the 2025 Los Angeles wildfires, for example, the state enacted provisions addressing the tax treatment of insurance proceeds, disaster relief grants, and casualty loss deductions. These provisions change with each disaster declaration, so the specific rules depend on when and where the disaster occurred.

If you received disaster relief payments and they appear in your federal AGI, check whether California provides a subtraction. The FTB publishes disaster-specific guidance on its website, usually within a few weeks of a federal disaster declaration.

Other Subtractions

• Railroad Retirement benefits — Tier 1 and Tier 2 Railroad Retirement benefits are exempt from California tax, similar to Social Security.
• Native American reservation income — Income earned by enrolled tribal members living and working on their tribe’s reservation is exempt from California income tax.
• Moving expenses (non-military) — California still allows a moving expense deduction for all taxpayers, not just military. If you moved for a new job and the distance and time tests are met, you can subtract moving expenses that aren’t deductible federally post-TCJA.
• Foreign earned income differences — California doesn’t conform to the federal foreign earned income exclusion (IRC Section 911). But if there are differences in how much foreign income is excluded, the reconciliation happens on Schedule CA.
• Ridesharing/transit benefits — Certain employer-provided commuter benefits have different California treatment than federal.

How Subtractions Affect Your Return

All Schedule CA subtractions flow to Form 540 Line 15. The formula is straightforward: Line 13 (federal AGI) + Line 14 (additions) – Line 15 (subtractions) = Line 17 (California AGI). Your California AGI then drives everything downstream: your standard deduction, your exemption credits, and your tax liability.

The subtractions also affect your eligibility for income-limited credits. The California Earned Income Tax Credit uses California AGI, not federal AGI, for its income threshold. Same for the renter’s credit. If Social Security subtractions bring your California AGI below the threshold, you might qualify for credits that your federal return would suggest you’re too wealthy to claim.

Don’t skip this section of Schedule CA. We’ve seen filers leave thousands of dollars on the table by not claiming the Social Security subtraction — either because they didn’t know California exempted it, or because their tax software didn’t handle it correctly. If you prepare your return at our office, we catch this automatically. But if you’re self-preparing, double-check that your Social Security is zeroed out on the California return.