Senate Bill No. 377 aims to establish a personal income tax deduction for military personnel who receive compensation for serving in funeral honor guard details. The bill amends the existing tax code by repealing subparagraph (B) of subdivision (20) of subsection (a) of section 12-701 and replacing it with provisions that allow for the subtraction of federally exempt income, specifically military funeral honor guard compensation, from gross income for state tax purposes. This change is set to take effect on July 1, 2026, and will apply to taxable years beginning on or after January 1, 2027. The intent of the bill is to provide financial relief to military personnel by ensuring that their honor guard compensation is not subject to state income tax.

In addition to the honor guard compensation deduction, SB 377 introduces new provisions for first-time homebuyer savings accounts, allowing deductions for contributions up to $2,500 for individuals and $5,000 for married couples filing jointly. The bill also includes a phased approach for the taxation of IRA distributions, enabling individuals with lower adjusted gross incomes to exclude a percentage of these distributions from state income tax. Key deletions from the current law involve the removal of certain income exemptions and adjustments to the treatment of pension and annuity income, aiming to provide tax relief to lower-income taxpayers while gradually increasing the taxable portion for higher earners. Overall, the bill is expected to result in a General Fund revenue loss of approximately $25,000 annually starting in FY 28.