Does South Carolina Tax Pension Income?

South Carolina’s tax structure provides a favorable environment for retirees, particularly concerning various forms of retirement income. While pension income is subject to state income tax, the state offers several deductions and exemptions that can significantly reduce the actual tax burden for many individuals.

South Carolina’s General Approach to Pension Taxation

Pension income is considered taxable income for South Carolina state tax purposes. Distributions from pensions are subject to the state’s income tax rates, which can range from 0% to a maximum of 6.4% or 7% depending on income levels. South Carolina is a tax-friendly state for retirees due to its significant deductions and exemptions specifically designed for retirement income.

The effective tax burden on pension income for many retirees in South Carolina is often low, or even nonexistent, because of these available tax benefits. While technically taxable, these deductions and exemptions substantially reduce the amount of pension income that is ultimately subject to state income tax.

Comprehensive Retirement Income Deductions and Exemptions

South Carolina offers various deductions and exemptions that can substantially reduce the taxable portion of retirement income, including pensions. These benefits are designed to lessen the state income tax burden for retirees. Understanding these provisions is key to managing tax obligations effectively.

General Retirement Income Deduction

Most retirees in South Carolina can benefit from a general retirement income deduction. Taxpayers aged 65 or older are eligible to deduct up to $10,000 of their retirement income annually. For individuals under the age of 65, a smaller deduction of up to $3,000 of qualified retirement income is available each year. This deduction applies broadly to various types of qualified retirement income, encompassing pensions, annuities, distributions from Individual Retirement Accounts (IRAs), and 401(k) plans.

The term “qualified retirement income” for this deduction includes income from Internal Revenue Code Sections 401, 403, 408, and 457, as well as public employee retirement plans from federal, state, and local governments, and military retirement. Surviving spouses receiving retirement income attributable to a deceased spouse can also apply this deduction in the same manner as the deceased spouse would have. If a surviving spouse has additional retirement income, a separate retirement exclusion may also be allowed.

Military Retirement Income Exemption

Military retirement pay receives favorable tax treatment in South Carolina. All military retirement pay that is included as taxable income is fully exempt from South Carolina Individual Income Tax, regardless of the recipient’s age. This means that 100% of military retirement pay is exempt from state income tax for tax years after 2021. A surviving spouse who receives military retirement income from their deceased spouse can also claim this full exemption.

Federal Civil Service Retirement Deduction

Federal civil service pensions are included in the broader category of “qualified retirement income” for the general retirement income deduction. For those aged 65 and older, up to $10,000 of federal civil service pension income can be deducted. Taxpayers under 65 can deduct up to $3,000 of this income annually.

South Carolina State and Local Government Retirement Deduction

Pensions received from South Carolina state or local government entities are also considered “qualified retirement income.” As such, they generally fall under the same deduction rules as other qualified retirement income sources. This means that individuals aged 65 or older receiving these pensions can deduct up to $10,000 annually, while those under 65 can deduct up to $3,000. The South Carolina Retirement System (SCRS), a defined benefit plan for state and local government employees, provides fixed monthly benefits that are subject to these deduction rules.

Private Pensions and Other Retirement Income

Private pensions fall under the general retirement income deduction available to most retirees. This means that private pension income is eligible for the $10,000 deduction for individuals aged 65 and older, or the $3,000 deduction for those under 65, as part of their total qualified retirement income. Other retirement income sources, such as annuities and distributions from IRAs and 401(k)s, are also covered by this same general deduction.

Application of Deductions

These deductions directly reduce the amount of pension income that is subject to South Carolina state income tax. To determine the taxable portion of pension income, taxpayers subtract the applicable deduction amount from their gross pension income. For instance, if a taxpayer aged 65 or older receives $15,000 in qualified pension income, they can deduct $10,000, leaving $5,000 as taxable income. If the total qualified retirement income is less than the maximum deduction amount, the taxable income from pensions can be reduced to zero.