Does South Carolina Tax Military Retirement?

State-level tax laws vary widely, and understanding how a state treats military retirement income is a component of financial planning for retired service members. The tax policies in South Carolina have undergone changes that directly impact the financial standing of military retirees residing within its borders.

State Taxation of Military Retirement Pay

South Carolina provides a full exemption for military retirement pay from state income tax. This tax benefit is the result of the Workforce Enhancement and Military Recognition Act, which made all military retirement pay deductible starting in tax year 2022. The law ensures that this income is not subject to the state’s income tax, regardless of the retiree’s age.

This exemption covers retirement pay from all branches of the armed forces, their respective reserve components, and the National Guard. The tax benefit also extends to payments received under the Survivor Benefit Plan (SBP). A surviving spouse receiving military retirement income, including dependent indemnity compensation, because of their deceased spouse’s service can also claim this deduction.

Tax Treatment of Other Retirement Income

While military retirement pay receives a full exemption, other forms of retirement income are treated differently under South Carolina’s tax code. Income from sources such as 401(k) plans, Individual Retirement Arrangements (IRAs), and civilian pensions is taxable.

The state does not tax Social Security benefits. For residents aged 65 and older, South Carolina offers a separate, general retirement income deduction. This allows for a deduction of up to $10,000 on income from sources like IRAs, government pensions, and 401(k)s. This deduction is distinct from the unlimited deduction for military retirement pay and is available to all qualifying senior residents, not just veterans.

Claiming the Military Retirement Exemption

To benefit from the tax exemption, military retirees must claim it as a deduction on their South Carolina Individual Income Tax return, Form SC1040. This subtraction removes the qualifying income from the state tax calculation.

The process involves reporting the total military retirement income included in federal adjusted gross income and then subtracting that amount on the state return. For surviving spouses, the process is similar. Detailed guidance can be found in publications from the South Carolina Department of Revenue.