South Carolina taxes for early retirees: new 2026 rates and a deduction with a trapdoor

By Tom, CPA · Updated October 29, 2026

TL;DR: South Carolina exempts Social Security, lets each original account owner deduct $3,000 of retirement income ($10,000 at 65), and gives a $15,000 age-65 deduction per person. Starting in 2026 the rates are 1.99% and 5.21%, but the new SCIAD deduction phases out on federal AGI, which pushes the marginal rate to about 6.6% in the phase-out range.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

South Carolina spent decades as the state where retirees went to golf, eat boiled peanuts, and compare porch ceilings. In 2026 it also became the state that quietly rebuilt its whole income tax. Act 110 of 2026 (H.4216) was signed on March 30, 2026, and applies to tax years beginning after December 31, 2025. It cuts the brackets to two, drops the top rate to 5.21%, stops following the federal standard deduction, and adds a new deduction that shrinks as your income grows.

For early retirees the headline is mostly good: Social Security is exempt, there's a retirement income deduction, a big age-65 deduction, a capital gain deduction, and no estate tax. The fine print is that the new deduction phases out on federal AGI, so income South Carolina doesn't even tax can still raise your South Carolina bill. Let's go through it with Lavish Larry and Frugal Fran, who both recently discovered that "y'all" is a pronoun.

CPA Warning Label: The SCIAD phase-out uses federal AGI, including taxable Social Security that South Carolina doesn't tax. Between $80,000 and $190,000 of joint AGI, each extra dollar costs about 6.6 cents of South Carolina tax, not 5.21.

The 2026 rates: two brackets and a trapdoor in the floor

For 2026, SCDOR Information Letter #26-20 gives this computation for South Carolina taxable income:

The bracket amounts are indexed each year using chained CPI. For contrast, the 2025 schedule ran from 0% up to a 6% top rate (it was 6.2% for 2024 and 6.5% for 2022). The same filing status brackets apply to everyone; there's no separate joint schedule.

Act 110 also has an autopilot for more cuts. Starting with tax year 2027, the 5.21% top rate drops if the Board of Economic Advisors projects individual income tax revenue to grow at least 5%. The cut is sized to give back the greater of $200 million or 25% of the recurring surplus, and it keeps going until the top rate reaches 1.99%, then continues toward 0%. The forecast in effect on February 15 is the one that counts. As of October 29, 2026, no 2027 rate had been announced, so plan with 5.21% and treat any cut as dessert.

Starting point: federal AGI, then the new SCIAD

Before 2026, South Carolina started from federal taxable income, so it inherited the federal standard deduction. Act 110 decouples from IRC section 63(b) through (g). That means South Carolina no longer allows the federal standard deduction, itemized deductions, the new federal senior deduction, the tip and overtime deductions, the car loan interest deduction, the QBI deduction, or the non-itemizer charitable deduction. South Carolina now starts with federal AGI.

In their place is the South Carolina Income Adjusted Deduction (SCIAD):

Inside the range, the SCIAD is reduced by a fraction: for joint filers, (AGI minus $80,000) divided by $110,000. Any reduction that isn't a multiple of $10 is rounded down to the next $10. Nonresidents and part-year residents prorate the SCIAD by the ratio of South Carolina AGI to federal AGI. SCDOR has said it will offer an online SCIAD calculator.

Here's the trapdoor: in every filing status, each extra dollar of AGI in the phase-out range removes about 27.3 cents of SCIAD. At the 5.21% rate, that's an effective marginal rate of roughly 6.63%, which is higher than the old 6% top rate. And because the phase-out uses federal AGI, the taxable part of your Social Security counts against you, even though South Carolina later subtracts it.

Social Security: fully exempt (but it still shrinks your SCIAD)

South Carolina doesn't tax Social Security. The SC1040 subtracts the Social Security and railroad retirement benefits included in federal AGI, so your benefits produce zero South Carolina tax directly.

Indirectly is another story. Federally, up to 85% of benefits can be included in AGI once your provisional income passes $34,000 (single) or $44,000 (joint), per IRS Publication 915. That federal AGI number is what drives the SCIAD phase-out. Lavish Larry, who takes big IRA withdrawals on top of his benefits, gets hit twice: once federally by the Social Security tax torpedo, and once in South Carolina by a smaller SCIAD.

The retirement deduction: $3,000 now, $10,000 at 65

Under Code section 12-6-1170(A), the original owner of a qualified plan can deduct retirement income. That includes 401(k), 403(b), 457 and IRA plans, plus federal, state and local government plans. The deduction is:

• Up to $3,000 per person before the year you reach 65.
• Up to $10,000 per person starting the year you reach 65.

Each spouse figures their own deduction on their own retirement income; you can't borrow your spouse's unused amount. Income subject to the federal premature-distribution penalty doesn't qualify, so a 50-year-old's penalized IRA withdrawal gets no deduction. A non-spouse beneficiary of an inherited IRA doesn't qualify either, because the deduction belongs to the original owner. Surviving spouses have special rules that let them use a deceased spouse's retirement income.

South Carolina's guidance we reviewed doesn't specifically say whether a Roth conversion counts as retirement income for this deduction, so check with SCDOR before you count on it.

Military retirees: since Act 156 of 2022, military retirement income is fully deductible at any age, with no dollar cap.

The age-65 deduction: $15,000 against any income

Starting in the year you reach 65, Code section 12-6-1170(B) gives a deduction of up to $15,000 per person, or $30,000 on a joint return when both spouses are 65 or older. It can be used against any South Carolina income: IRA withdrawals, Roth conversions, dividends, rent, even wages.

The catch is that it's reduced by any retirement deduction and military retirement deduction you claimed. So a 66-year-old with $30,000 of IRA withdrawals gets a $10,000 retirement deduction and then $5,000 more from the age-65 deduction, for $15,000 total, not $25,000. Think of it as a bucket ($15,000 for one person 65 or older, $30,000 on a joint return when both are) that the retirement deductions fill first.

Illustration: Frugal Fran and her husband, both 66, file jointly for 2026. Assumptions: $30,000 each from their own IRAs ($60,000 total), $40,000 of combined Social Security, no other income. Federally, $34,000 of their benefits are taxable, so federal AGI is $94,000. The SCIAD reduction is $30,000 times $14,000 divided by $110,000, which is $3,818.18, rounded down to $3,810, leaving a SCIAD of $26,190. South Carolina taxable income is $94,000 minus $34,000 Social Security, minus $20,000 retirement deductions, minus $10,000 remaining age-65 deduction, minus $26,190 SCIAD, which equals $3,810. Tax at 1.99% is about $76. That's less than a nice dinner in Charleston, and the dinner doesn't come with a 1099-R.

Capital gains: a 44% deduction (for now)

Under the 2025 SC1040 instructions, South Carolina lets you deduct 44% of net capital gains on assets held more than one year. Act 110's summaries don't list a change to this deduction, but the 2026 SC1040 instructions weren't published as of October 29, 2026, so confirm it when they come out.

Illustration: Lavish Larry and his wife, both 60, file jointly for 2026. Assumptions: $25,000 each from their own IRAs with no early-withdrawal penalty (they're over 59½), $40,000 of long-term capital gains, no Social Security yet. Federal AGI is $90,000, so the SCIAD is $30,000 minus a $2,720 reduction, or $27,280. The capital gain deduction is 44% of $40,000, or $17,600, and their retirement deductions are $3,000 each. South Carolina taxable income is $90,000 minus $17,600, minus $6,000, minus $27,280, which equals $39,120. Tax is 5.21% times $39,120 minus $966, or $1,072.15. Every extra dollar of gain inside the phase-out range costs about 4.3 cents: 5.21% on the 56% that's taxed, plus the lost SCIAD. That's still a bargain next to a lot of states.

Property tax: the homestead exemption

South Carolina property tax is handled by counties, but the state sets the big exemptions. Homeowners who are 65 or older, totally and permanently disabled, or legally blind, and who have been residents for at least one year, can exempt the first $50,000 of their home's fair market value. For tax year 2026, a temporary budget proviso adds another $25,000, for a total of $75,000. Temporary provisos expire unless reenacted, so don't build a 30-year plan on it. You apply with your county auditor.

Your primary residence (legal residence) is also assessed at 4% of value instead of the 6% used for most other property, which you also claim with the county. Other things worth knowing:

• No estate or gift tax.
• Sales tax is 6% statewide plus local taxes. Residents 85 or older get a 1% sales tax discount.

Estimated payments and moving in

If you'll owe $100 or more of South Carolina tax after withholding and credits, you're expected to make estimated payments with the SC1040-ES. The 2026 due dates are April 15, June 15 and September 15, 2026, and January 15, 2027. Larry, whose IRA has no withholding, should not treat this as a suggestion.

The year you move in you're a part-year resident, and SCDOR lets you choose: file as a resident and claim a credit for tax paid to the other state, or file as a nonresident with Schedule NR. If you're leaving a high-tax state, make the move clean; see the residency change guide. Comparing neighbors? See North Carolina, Georgia, or the no-income-tax option in Florida, then run numbers in the state tax move calculator.

A South Carolina early-retirement checklist

• Figure your federal AGI first, because it drives the SCIAD. Taxable Social Security and Roth conversions both count.
• In the phase-out range ($80,000 to $190,000 joint), assume about a 6.6% marginal South Carolina rate on ordinary income.
• Before 59½, avoid penalized withdrawals if you can; they lose the $3,000 retirement deduction. Look at the rule of 55 or a 72(t) plan instead.
• At 65, each person gets up to $15,000 of combined retirement and age-65 deductions. Plan Roth conversions to use it.
• Hold investments over a year so gains get the 44% deduction, then confirm the rule on the 2026 forms.
• Apply for the homestead exemption and the 4% legal residence ratio with your county.
• Watch for the February 2027 forecast that decides whether the top rate drops again.

Everything here comes from SCDOR information letters, revenue rulings and forms as of October 29, 2026. The 2026 SC1040 and instructions weren't out yet, so check for updates before you file. This is general education, not personalized advice.