South Carolina does not tax most pension income, but the rules depend on what kind of pension you receive and when you started collecting it.

If you receive a pension from your employer — whether from a government job, military service, or private company — South Carolina does not tax that income. The state exempts all pension payments from state income tax, regardless of the amount. This applies to pensions you receive monthly or as a lump sum.

The exemption also covers military retirement pay, federal employee pensions, and teacher pensions. If your only income is pension income, you will owe no South Carolina state income tax on it.

However, the exemption does not cover all retirement income. Social Security benefits, 401(k) withdrawals, IRA distributions, and annuities have different rules. Understanding which income is protected and which is not matters when you file your state return.

Key Takeaways

  • South Carolina exempts all pension income from state income tax, including military pensions, government pensions, and private employer pensions.
  • The pension exemption applies regardless of how much you receive or whether you take it as monthly payments or a lump sum.
  • Social Security benefits, 401(k) withdrawals, and IRA distributions are not covered by the pension exemption and may be taxed differently.
  • If you receive both pension income and other retirement income, you will need to report each type separately on your state return.

What counts as a pension under South Carolina law

A pension is a regular payment from an employer's retirement plan, usually based on your years of service and salary. South Carolina's exemption covers pensions from any source: private companies, state and local government, the federal government, and the military.

The exemption also covers survivor benefits — payments your spouse or children receive after you die — as long as those payments come from a pension plan. If your employer offers a lump-sum option instead of monthly payments, that lump sum is also exempt.

Deferred compensation plans, such as a 457 plan offered by some government employers, are treated as pensions for tax purposes in South Carolina. When you withdraw money from a deferred comp plan, that withdrawal is exempt from state income tax.

Retirement income that South Carolina does tax

Social Security benefits are not taxed by South Carolina, even though the federal government may tax them. You will not owe state income tax on Social Security payments.

401(k) and 403(b) withdrawals are taxed as ordinary income by South Carolina. If you withdraw money from a 401(k) before age 59½, you may also owe a 10 percent federal penalty, but South Carolina does not add its own early-withdrawal penalty. The state taxes the full amount you withdraw.

Traditional IRA distributions are taxed as ordinary income. Roth IRA withdrawals of contributions (the money you put in) are not taxed, but earnings on those contributions are taxed if you withdraw them before age 59½ and do not meet other conditions.

Annuities purchased outside a retirement plan are taxed on the earnings portion only, not on the amount you originally paid for the annuity. The tax treatment depends on whether the annuity is may have access to (held in a retirement plan) or non-may have access to.

How to report pension income on your South Carolina return

You will receive a 1099-R form from your pension provider by January 31 each year. This form shows the total amount you received. Even though the income is exempt from South Carolina tax, you must still report it on your state return to claim the exemption.

On the South Carolina Form SC 1040, you report your pension income on the line for federal adjusted gross income, then subtract it as an exemption. The result is that your taxable income for state purposes does not include the pension amount.

If you receive both pension income and other retirement income — such as 401(k) withdrawals or IRA distributions — you report each type separately. Only the pension portion is exempt; the other income is taxable.

Pension income and federal taxes

South Carolina's exemption applies only to state income tax. The federal government taxes most pension income as ordinary income. If you receive a pension, you will likely owe federal income tax on it unless you have other deductions or credits that reduce your federal tax.

Military pensions are taxed by the federal government the same way as other pensions. Federal employees and railroad retirees may have different rules under federal law, but South Carolina does not distinguish between them — all pensions are exempt from state tax.

Your pension provider will withhold federal income tax from your payments if you request it. You can adjust your withholding by completing a W-4P form and sending it to your pension administrator.

Special rules for certain government employees

Teachers, police officers, and other government employees in South Carolina may participate in the South Carolina Retirement System (SCRS) or the Police Officers Retirement System (PORS). Pensions from these systems are fully exempt from South Carolina state income tax.

Employees of local school districts and municipalities may also participate in optional retirement plans (ORP) instead of the state system. Distributions from an ORP are treated as 403(b) plan distributions, which means they are taxed as ordinary income by South Carolina — they do not receive the pension exemption.

If you are unsure whether your government pension comes from a state retirement system or an optional plan, contact your employer's human resources or benefits office. They can tell you which system you participate in and how your distributions will be taxed.

What to do if you receive a pension and other income

If your only income is a pension, you may not owe South Carolina income tax at all. However, if you also receive wages, self-employment income, investment income, or distributions from retirement accounts, you will owe tax on those amounts.

Your total tax depends on your total income from all sources. South Carolina uses a progressive tax system with rates ranging from 0 percent to 7 percent depending on your income level. You will need to add up all your income, subtract the pension exemption, and calculate tax on the remainder.

If you are unsure whether you owe tax, you can contact the South Carolina Department of Revenue or work with a tax professional. The department's website includes worksheets and instructions for calculating your state income tax.

Frequently Asked Questions

Do I have to file a South Carolina tax return if I only receive pension income?

No. If your only income is a pension, you do not have to file a South Carolina return because the pension is exempt from state tax and you have no other taxable income. However, you may want to file anyway if you had taxes withheld from your pension, because you could receive a refund.

Is my military pension taxed by South Carolina?

No. Military retirement pay is fully exempt from South Carolina state income tax. The federal government will tax it, but South Carolina will not. You must still report it on your state return to claim the exemption.

What if I receive a lump-sum pension payment instead of monthly payments?

The lump sum is also exempt from South Carolina state income tax. You will receive a 1099-R form showing the total amount, and you report it on your state return the same way you would report monthly pension payments. The federal government will tax the lump sum as ordinary income.

Are 401(k) withdrawals taxed differently than pension income in South Carolina?

Yes. Pensions are exempt from South Carolina state income tax, but 401(k) withdrawals are taxed as ordinary income. If you receive both, you report them separately on your return and pay tax only on the 401(k) portion.

Can I reduce my South Carolina taxes by taking a pension distribution instead of a 401(k) withdrawal?

If you have a choice between receiving income as a pension or as a 401(k) distribution, the pension will result in lower South Carolina state income tax because it is exempt. However, the federal tax treatment is the same for both. Consult a tax professional before making decisions about how to receive retirement income.