8 Retirement Income Rules That Change What South Carolinians Owe the State

South Carolina is handing its taxpayers an estimated $325 million a year in savings under a tax law Governor Henry McMaster signed this spring.

That part is easy to like.

Retirement income in South Carolina still runs through a separate stack of deductions, exemptions, and traps the new law never touched.

These are the retirement income rules that change what South Carolinians owe the state.

Note: This is general information, not tax advice. South Carolina’s deduction amounts, exemptions, and tax rates are subject to change.

1. Original-Owner Catch

South Carolina’s retirement income deduction only belongs to the original owner of the account.

It’s not the person who inherits it.

A South Carolinian who inherits a parent’s individual retirement account (IRA) and starts drawing it down doesn’t get the same deduction.

Only the original owner could subtract those first few thousand dollars.

Many heirs assume any retirement account carries the same tax break once the money lands in their name.

It doesn’t work that way.

The state only extends the deduction to the person who built the account through years of contributions.

An inherited withdrawal counts as fully taxable income on the South Carolina return instead.

2. $10,000 Deduction

South Carolina lets a taxpayer subtract up to $10,000 of qualifying retirement income once they turn 65.

Before 65, the same deduction tops out at $3,000 a year.

Pensions, 401(k) withdrawals, traditional IRA distributions, and payouts from a public employee retirement plan all qualify.

Here’s the part many couples miss: The deduction applies per taxpayer, not per tax return.

A married couple where both spouses are 65 and older, and both draw retirement income from separate accounts, can each claim the full $10,000.

That’s $20,000 combined.

An unused deduction on one spouse’s pension doesn’t carry over to the other spouse’s return, though.

A retiree married to someone with no retirement income still only gets one $10,000 deduction, not two.

3. Second Deduction at 65

South Carolina cuts a retiree’s tax bill a second time the year they turn 65, layered directly on top of the retirement-income deduction from the last section.

A retiree already using the $10,000 deduction on a pension or IRA can claim this second one too, against whatever taxable retirement income is left over.

A single filer can claim up to $15,000, and a married couple filing jointly can claim $30,000 once both spouses have reached 65.

That’s two deductions at once.

This deduction applies against any income at all, not just retirement withdrawals.

Wages, interest, rental income, and part-time work all count toward it.

The two deductions share one shrinking pool, though.

The state reduces this age-65 deduction by whatever amount a retiree already claimed under the retirement-income deduction, so the two don’t simply add together.

4. Social Security Exemption

South Carolina doesn’t tax a single dollar of Social Security.

Wealthy retirees benefit most.

Railroad retirement benefits get the same treatment.

Whatever portion of those benefits the federal government taxes, South Carolina exempts the whole thing from the state return.

It doesn’t matter how much other income a retiree has, either.

Unlike the federal government, which can tax up to 85% of a high earner’s Social Security check, South Carolina applies no income threshold or phase-out to this exemption.

A retiree pulling $200,000 from investments still owes South Carolina nothing on their Social Security check.

5. Military Retirement Break

South Carolina fully exempts military retirement pay from its income tax.

Every rank qualifies.

There’s no dollar cap and no age requirement attached to it.

Governor Henry McMaster signed the change into law in May 2022, replacing an older system that only gave a full break to veterans with 20 years of service.

Before that law, a retiree who left the military at 15 years got a much smaller deduction than a career veteran did.

Now every veteran’s retirement check counts the same, whether they served four years or thirty.

South Carolina joined more than thirty other states with a similar policy when it made the switch.

6. New Tax Brackets for 2026

South Carolina now taxes a retiree’s pension and IRA withdrawals under brand-new brackets, effective with the 2026 tax year.

The old system taxed that same withdrawal at rates rising toward 6%.

Retirees felt every point.

The new law, Act 110, taxes income under $30,000 at 1.99% and everything above that at 5.21%, minus a flat $966.

That rate only reaches what’s left after the retirement-income, age-65, and standard deductions trim a retiree’s pension or IRA withdrawal.

The rewrite sends an estimated $325 million back to South Carolina taxpayers a year, and the law built it to land heaviest on lower earners.

A retiree living on a modest pension keeps more of that relief than someone still pulling six-figure investment income.

The new deduction shrinks as income rises instead of staying flat, so a smaller retirement check keeps a bigger share of the tax cut.

7. New Standard Deduction

The state now shields a slice of a retiree’s taxable pension and IRA withdrawals behind a brand-new standard deduction.

The same 2026 law that rewrote the tax brackets created it, replacing South Carolina’s old habit of borrowing the federal standard deduction number.

It’s worth up to $30,000 for a married couple filing jointly, $22,500 for a head of household, and $15,000 for everyone else.

That helps every retiree.

A retiree’s Social Security check and exempt military pension never touch this number, since both are already off the table by the time it applies.

Taxable pension and IRA withdrawals run straight through it, though, the same way wages or interest would.

The deduction shrinks for higher earners instead of staying flat for everyone.

8. Surviving Spouse Deduction

South Carolina lets a surviving spouse keep claiming a deceased spouse's retirement-income deduction on income that traces back to that spouse's account.

The state uses the deceased spouse's age to figure the deduction, not the survivor's age.

A 58-year-old widow drawing her late husband's pension still gets the full $10,000 deduction if he would have turned 65 that year.

She doesn't have to wait until she turns 65 herself.

That's the one exception.

A child or another beneficiary who inherits a retirement account loses the deduction completely, but the law lets a surviving spouse keep it running as if nothing changed.

The continuation comes straight from South Carolina's retirement-income law.

It carries the deduction forward for a surviving spouse exactly as it applied to the deceased spouse.