Does South Carolina Tax Pension Income?

South Carolina residents are subject to state income tax on their overall income. The state’s tax structure largely aligns with federal income tax laws, adopting many of the adjustments, exemptions, and deductions permitted on federal returns. This alignment simplifies the process for taxpayers, as their federal taxable income often serves as the starting point for determining their state tax liability. Understanding how the state treats various income streams, particularly those received in retirement, is important for financial planning.

Taxability of Pension Income

Pension income received by South Carolina residents is generally subject to state income tax. This principle applies broadly to various types of pension plans, including those from private employers, state and local government entities, and the federal government. This income is considered part of a taxpayer’s gross income, which establishes the baseline for calculating state tax obligations. However, South Carolina offers specific deductions that can significantly reduce the taxable portion of pension and other retirement income.

South Carolina Retirement Income Deduction

South Carolina offers a significant deduction for retirement income, outlined in South Carolina Code Section 12-6-1170. This deduction aims to reduce the state income tax burden for retirees. The amount a taxpayer can deduct depends on their age and the type of retirement income received.

For taxpayers who are under 65 years old, an annual deduction of up to $3,000 of qualified retirement income is allowed. This applies to income from:
Internal Revenue Code Sections 401, 403, 408, and 457 plans
Public employee retirement plans from federal, state, and local governments
Individual retirement plans
Keogh plans

Upon reaching age 65, the annual deduction for qualified retirement income increases to a maximum of $10,000. This higher deduction further benefits older retirees by allowing a larger portion of their pension, IRA distributions, 401(k) distributions, and 403(b) distributions to be excluded from taxable income. A surviving spouse receiving retirement income attributable to a deceased spouse can also apply this deduction in the same manner as the deceased spouse would have.

Additionally, resident individual taxpayers who are 65 years or older may be eligible for a broader deduction from their South Carolina taxable income, up to $15,000. This general deduction can apply to any type of taxable income, including wages, investment income, or rental income. However, the amount of this $15,000 deduction is reduced by any retirement income deduction already claimed under the specific retirement income provision. For married taxpayers filing jointly, if both spouses are 65 or older, the maximum combined deduction can be up to $30,000, subject to the same reduction for retirement income deductions.

Military Retirement Income

South Carolina provides favorable tax treatment for military retirement income, offering a full exemption from state income tax. Effective for tax years beginning after 2021, individuals can deduct all military retirement income included in their South Carolina taxable income. This provision represents a complete exemption for qualified military retirement pay.

This tax benefit applies to military retirees, regardless of their age. The exemption is also available to a surviving spouse receiving military retirement income that is attributable to the deceased spouse. This specific deduction for military retirement income is distinct from the general retirement income deductions available to other retirees.

Other Retirement Income Considerations

Beyond pensions and military retirement, other forms of retirement income are treated distinctly in South Carolina. Social Security benefits, for instance, are entirely exempt from state income tax. This means that recipients do not owe any South Carolina income tax on their Social Security payments, regardless of the amount received.

Taxpayers may have multiple sources of retirement income, and the various deductions can interact. For example, the general retirement income deduction for those aged 65 and older is offset by any specific retirement income deductions already claimed.