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State of California Franchise Tax Board

Tax Changes for Non-California Military Personnel

Senate Bill 615 Provides Tax Relief for Nonresident Servicemembers

Military personnel stationed in California who are not California residents will benefit from the signing of SB 615, the Franchise Tax Board (FTB) announced.

“I want to thank the Governor and Legislature for enacting this bill,” said State Controller and FTB Chair Steve Westly. “SB 615 enables the FTB to simplify taxes, and to sometimes lower taxes, for our out-of-state service men and women.”

SB 615 conforms the California Revenue and Taxation Code to the tax changes in federal H.R. 100, the Servicemembers' Civil Relief Act. The act, signed into federal law last December, prohibits any state from using the “California method,” which includes military income in computing total income for state tax computations. Although California does not tax the military pay of servicemembers living outside of California, the total income calculation determines the state tax bracket to apply to non-military California income.

A military taxpayer living in a state other than California, who earns California-source non-military income from a part-time job for example, will most likely pay a lower state tax under this new law. It may also reduce the complexity of computing state income taxes by eliminating the total income-from-all-sources calculation. This change affects the tax rate, credit percentage, and deduction percentage.

Servicemembers not domiciled in California who have not yet filed their 2003 California tax returns should compute their state tax amount by eliminating their military income from the California tax return (excluded from total income on Schedule CA, Column D). The FTB requires refund claims for older years and for those who already filed for 2003 using prior law to be submitted on the California Form 540X, Amended Individual Income Tax Return. The FTB advises taxpayers to write, “H.R. 100” in red at the top of the amended return, and to include a daytime phone number.

Because the State's Constitution bars California from automatically adopting federal laws, California had to enact a state law to conform to the federal changes. The Federal Act is largely a restatement and modernization of the Soldiers' and Sailors' Civil Relief Act of 1940.

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