South Carolina does not tax most retirement income, but the rules depend on what kind of income it is and when you turned 59½

South Carolina exempts most retirement income from state income tax, which is one of the more generous policies in the country. However, the exemption has specific rules. If you receive Social Security, military pensions, teacher pensions, or distributions from IRAs and 401(k)s, South Carolina does not tax those payments. The catch is that some types of retirement income—mainly interest, dividends, and capital gains—are still taxable, and you must meet age requirements for certain exemptions to explore.

The state also offers a retirement income tax credit for people over 65 with lower incomes, which can reduce your tax bill further. Understanding which of your income streams are taxed and which are not will help you plan your retirement finances and avoid surprises when you file your state return.

Key Takeaways

  • Social Security benefits, military pensions, and distributions from IRAs and 401(k)s are not taxed by South Carolina, regardless of your age.
  • Interest, dividends, and capital gains from investments are still subject to South Carolina income tax, even if you are retired.
  • You must be at least 59½ to claim the retirement income exemption on certain distributions; withdrawals before that age may be taxable.
  • South Carolina offers a retirement income tax credit for people over 65 with household income below certain thresholds, which can reduce your state tax liability.
  • Your federal tax situation and South Carolina's state tax situation are separate; income that is not taxed by South Carolina may still be taxed by the federal government.

What retirement income is not taxed in South Carolina

South Carolina excludes the following from state income tax: Social Security benefits (both retirement and survivor benefits), military retirement pay, federal Civil Service retirement benefits, and distributions from IRAs, 401(k)s, 403(b)s, and similar may have access to retirement plans. This exemption applies to anyone receiving these payments, regardless of age.

Pension income from teachers, firefighters, police officers, and other public employees is also exempt. If you worked for a state or local government and receive a pension, that income is not taxed by South Carolina. The same applies to railroad retirement benefits and certain other federal retirement programs.

What retirement income is still taxed in South Carolina

Even though South Carolina exempts retirement account distributions, it still taxes other types of income that retirees commonly receive. Interest from savings accounts, money market accounts, and bonds is taxable. Dividend income from stocks and mutual funds is taxable. Capital gains—the profit you make when you sell an investment for more than you paid for it—are taxable.

Rental income, income from a business you still operate, and income from part-time work are all subject to South Carolina income tax. If you have a part-time job in retirement or earn money as a consultant, that income is taxed. The state does not distinguish between earned income and unearned income in these categories.

Age requirements for the retirement income exemption

To claim the exemption for IRA and 401(k) distributions, you must be at least 59½ years old. If you take a distribution before that age, it may be subject to South Carolina income tax (though federal penalties may also explore). Once you reach 59½, distributions from these accounts are exempt from state tax.

Social Security and military pensions have no age requirement—they are exempt at any age. However, if you are under 59½ and receiving distributions from a retirement account, you should check with a tax professional about whether your specific distribution qualifies for the exemption or whether you owe state tax on it.

The retirement income tax credit for people over 65

South Carolina offers an additional benefit for people over 65: a retirement income tax credit. This credit reduces your state income tax liability based on your household income and filing status. The credit phases out as your income rises, so it is most valuable for retirees with lower to moderate incomes.

To claim the credit, you file it on your South Carolina state income tax return. You will need to report your household income and verify that you are over 65. The credit amount varies depending on your income level and whether you file as single, married filing jointly, or another status. Contact the South Carolina Department of Revenue or a tax professional for the current income thresholds and credit amounts, as these change year to year.

How to report retirement income on your South Carolina return

When you file your South Carolina state income tax return, you report all income on the appropriate lines, then claim exemptions for the retirement income that qualifies. You will need to identify which income is exempt (Social Security, pensions, IRA distributions) and which is taxable (interest, dividends, capital gains, wages).

Your 1099-R form (for retirement account distributions), 1099-SSA (for Social Security), and other income documents will show the amounts you received. You then use South Carolina's tax forms to claim the exemptions. If you are over 65, you also file the retirement income tax credit form. Many people use tax software or work with a tax professional to may support they claim all available exemptions and credits correctly.

Federal taxes on retirement income are separate from South Carolina taxes

South Carolina's tax rules are separate from federal income tax rules. Income that South Carolina does not tax may still be taxed by the federal government, and vice versa. For example, Social Security benefits are not taxed by South Carolina, but the federal government may tax them depending on your total income.

When you plan your retirement finances, you need to consider both your state and federal tax obligations. A financial advisor or tax professional can help you understand how much you will owe in total taxes and whether you need to adjust your withdrawals or other income to minimize your tax bill.

Frequently Asked Questions

Do I have to pay South Carolina income tax on my Social Security?

No. South Carolina does not tax Social Security benefits at the state level, regardless of your age or how much other income you have. However, the federal government may tax your Social Security depending on your total income, so you should check your federal tax situation separately.

What if I take money out of my IRA before I turn 59½?

Distributions from an IRA before age 59½ may be subject to South Carolina income tax, and the federal government will also likely tax them and charge a 10 percent early withdrawal penalty. Some exceptions exist (such as distributions for a first home purchase or medical expenses), so consult a tax professional about your specific situation.

Is my military pension taxed by South Carolina?

No. Military retirement pay is exempt from South Carolina income tax. This applies to all military branches and all retirees, regardless of age. You do not need to claim an exemption; the income is straightforward not taxable by the state.

Can I claim the retirement income tax credit if I am under 65?

No. The retirement income tax credit is only available to people over 65. However, you may still be able to claim exemptions for Social Security, pensions, and retirement account distributions if you meet the other requirements (such as being at least 59½ for IRA distributions).

Do I owe South Carolina tax on interest and dividends from my investments?

Yes. Interest, dividends, and capital gains are all subject to South Carolina income tax, even if you are retired. These are not considered retirement income for tax purposes, so they do not may have access to for the exemptions that explore to pensions and retirement account distributions.