Personal Income Tax Law: exclusions: military retirement pay: survivor benefit pay.

The income exclusion amount was reduced from a flat $80,000 for all years 2025-2036 to a phased structure: $20,000 for taxable year 2025 only, then $40,000 for taxable years 2026 through 2036. This applies to both Section 17132.9 (military retirement pay) and Section 17132.10 (survivor benefit plan annuities).

A new paragraph (a)(2) was added to both Sections 17132.9 and 17132.10, creating a separate provision for taxable years beginning on or after January 1, 2026, with the $40,000 exclusion limit.

The definitions in both sections were reorganized. The 'uniformed services' definition was moved from a standalone subdivision to paragraph (2) under a new 'the following definitions apply' structure in subdivision (b).

Additional coauthors were added: Senators Choi and Cervantes, and Assembly Members Davies and Jeff Gonzalez.

The maximum amount of military retirement pay and Survivor Benefit Plan annuity payments eligible for state income tax exclusion was increased from $20,000 to $80,000 per taxable year in both Section 17132.9 and Section 17132.10.

A new annual inflation adjustment mechanism was added to both sections. Starting January 1, 2027, the Department of Industrial Relations must transmit the percentage change in the California Consumer Price Index (all items, June-to-June) to the Franchise Tax Board by August 1 each year. The FTB then computes an inflation adjustment factor and multiplies the AGI eligibility thresholds by that factor, rounding to the nearest dollar.

The sunset date for both exclusions was extended from taxable years beginning before January 1, 2030 (repealed December 1, 2030) to taxable years beginning before January 1, 2037 (repealed December 1, 2037).

The introduced version's digest indicated the bill would eliminate income limitations for taxpayers. The amended version instead retains the existing adjusted gross income caps ($250,000 for joint filers, $125,000 for others) and adds inflation indexing to those thresholds rather than removing them entirely.