Note: the process for manual income adjustments is described on page 103.

California doesn’t tax certain federally taxable income; such subtractions are listed below by section and line number of CA Schedule CA Part I, where they should appear. As noted above, in TaxSlayer they appear only on line 8z of Section B.

    • Note: There’s a question in TaxSlayer’s CA section on the Other Subtraction 1 [or 2 or 3] page: “Is this entry exempt Native American Income, which may be reported on FTB 3504?”. Except where noted below, the answer is “No.” (This question refers to FTB Form 3504, Enrolled Tribal Member Certification. Tribal members are supposed to file this form separately from their tax return to document any income not taxable by CA. See FTB Form 3504 Instructions.)
  • [Section A, line 1a] Military retirement income: New for TY 2025:  For 2025 through 2029, up to $20,000 of a Defense Finance Accounting Service military pension may be excluded from California income (DFAS, EIN 34-0727612).
    • AGI must be under $250,001 if MFJ or receiving a survivor’s pension, $125,001 for all others.
    • The exclusion is only for uniformed servicemembers or their surviving spouse.  You must ask if the pension was for work in a “uniformed service”; civilian DFAS pensions don’t qualify.
      • Uniformed services are:  Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Guard, NOAA Commissioned Officers, US Public Health Service.
    • As of the date of this manual, TaxSlayer input is unknown. 
  • [A, 1a] Military income: Active-duty military pay is only taxable by California if the military member is domiciled and stationed in California and the pay is earned in California.
  • [A,1a] Clergy housing income – tax provisions peculiar to clergy make the return out-of-scope).
  • [A,1a] Indian tribal members’ income, if the member lives and works on tribal land – see the section W-2 Form - Indian Tribal Income, page 26.
    • Must manually enter the CA adjustment; also answer “Yes” to the question about FTB Form 3504. The adjustment posts to Section B, line 8z.
  • [A,2] Interest from municipal bonds issued by California, including counties, cities, and agencies - see the section Interest Income on Form 1099-INT, page 31.
    • TaxSlayer’s page allows specifying an amount of tax-exempt interest as taxable on the state return; if not so specified, it’s automatically treated as not taxable by CA.
  • [A,2] Interest from U.S. Government Savings Bonds, Treasury Bills, and any other bonds of the U.S. or its territories – see page 31.
    • Use TaxSlayer’s page to specify this interest as not taxable by California.
  • [A,3] Dividends from CA municipal bond funds - see Line 3 - Dividends, page 33.
    • Specify the taxable amount for CA, if any, on TaxSlayer’s 1099-DIV page. 
  • [A,3] Dividends from U.S. government bond funds (1040 Line 3) – see page 33.
    • Enter the adjustment on appropriate line of TaxSlayer’s 1099-DIV page.
  • [A,5] Tier II Railroad Retirement benefits (1040 Line 5) - see page 43.  TaxSlayer automatically adjusts.
  • [A,6] Social Security benefits (U.S. only) (1040 Line 6) - see page 43.
    • TaxSlayer automatically adjusts. If Canadian or German social security is entered, manual adjustment is required, because these payments are taxable by California – see page 46.
  • [A,6] Tier 1 Railroad Retirement benefits (1040 Line 6) - see page 45.
    • TaxSlayer automatically adjusts (this is Social Security equivalent).
  • [10] Any state tax refunds (1040 Schedule 1 Line 1) - see page 34.  TaxSlayer automatically adjusts.
  • [19] Unemployment compensation paid by CA or another state (Schedule 1 Line 7) - see page 61.
    • TaxSlayer automatically adjusts.
  • [21] Indian tribal members’ benefits, if the member lives on his or her tribal land – see Indian Tribal Income on page 53.
    • Must manually enter the CA adjustment; also answer “Yes” to the question about FTB Form 3504.
  • [21] Lottery winnings in California (Schedule 1 Line 8b) – see the section Gambling Winnings (Form W-2G, Form 1099-MISC, or Cash), which begins on page 62 [other states’ lottery winnings are taxable by CA].
    • Must manually enter the CA adjustment. 
  • [21] Government-agency authorized reward from a crime hotline (Schedule 1 Line 8z) - see FTB Pub 1001 for details.  Must manually enter the CA adjustment. 
  • [21] HSA distribution in excess of qualified medical expenses (Schedule 1 Line 8f) – see Health Savings Accounts in CA, page 108.  Must manually enter the CA adjustment. 

Additional Business Expenses

California allows certain self-employment business-related expenses not allowed on the federal Schedule A. These reduce California taxable income and are entered on CA Schedule CA Part I line 12.

  • Work-related educational expenses for which the Lifetime Learning Credit was claimed
    • If the taxpayer has a Schedule C on the return, and the educational expenses are related to that business, and the business has a net profit, then those work-related educational expenses can be used to reduce income on the CA return [the reduction is the lesser of the educational expenses or the net profit].
      • The adjustment must be manually entered.
  • Entertainment expenses which are business-related
    • California still allows entertainment expenses as a business deduction. As of the publication date of this manual, TaxSlayer doesn’t separate meal expenses from entertainment expenses, on the Schedule C – Expenses page, so you must make a manual adjustment.

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