South Carolina Income Tax on Military Retirement Pay

Section 12-6-1171(A) is one sentence: "An individual taxpayer may deduct all military retirement income that is included in South Carolina taxable income." No cap, no age condition, no residency condition inside the section, no requirement that the retirement be for twenty years, and no distinction between regular and reserve component retired pay. Two 2022 acts got it there on the same track. Act No. 156 of 2022, the Workforce Enhancement and Military Recognition Act, and Act No. 228 of 2022, the Comprehensive Tax Cut Act of 2022, both amended subsection (A), and the Code Commissioner read them together. Both first apply to tax years beginning after 2021. What preceded it matters if you are looking at an old return. The 2016 phase-in, Act No. 272 of 2016, started the deduction at five thousand nine hundred dollars under age sixty-five and eighteen thousand at sixty-five and above, rising each year until 2020. Every figure in that phase-in is gone. A source that prints an age-tiered military retirement deduction for South Carolina is describing tax year 2021 or earlier. Subsection (B) defines "retirement income" for this section as otherwise taxable income, not subject to a premature distribution penalty, "from a qualified military retirement plan". For a surviving spouse it reaches further: it also includes "a retirement benefit plan and dependent indemnity compensation related to the deceased spouse's military service". Survivor Benefit Plan annuity payments are inside the deduction on the face of the statute. Dependency and Indemnity Compensation is federally tax-free and so never reaches South Carolina taxable income in the first place, but the drafting says the state would not tax it if it did. Subsection (C) tells a surviving spouse to apply the deduction "in the same manner that the deduction applied to the deceased spouse", and adds that if the surviving spouse also has another retirement income, "an additional retirement exclusion is allowed". Now the offset, which is the part that changes the arithmetic and which almost no secondary source mentions. Section 12-6-1170 is the general retirement income deduction: up to three thousand dollars of retirement income under age sixty-five, up to ten thousand at sixty-five and above, in subsection (A); and a separate age sixty-five and older deduction of up to fifteen thousand dollars against any income, reduced by whatever was taken under subsection (A), in subsection (B). For a married couple filing jointly where both are sixty-five, the subsection (B) figure is thirty thousand dollars. Section 12-6-1170(C)(1) then says: "Notwithstanding any other provision of this section, if a taxpayer claims a deduction pursuant to Section 12-6-1171, then the deduction allowed by this section must be reduced by the amount the taxpayer deducts pursuant to Section 12-6-1171; however, this subsection does not apply if the deduction claimed pursuant to Section 12-6-1171 is claimed by a surviving spouse." The Department of Revenue confirms both halves of that in Revenue Ruling 22-11. Amounts deducted as military retirement income reduce the three thousand or ten thousand dollar general retirement deduction under Section 12-6-1170(A), and they also reduce the fifteen thousand dollar age sixty-five and older deduction under Section 12-6-1170(B). Amounts deducted by a surviving spouse do not reduce either. The practical effect for a retiree at sixty-five with more than fifteen thousand dollars of military retired pay is that the military deduction absorbs the whole of both general deductions. The military retirement is untaxed either way; what is lost is the shelter that would otherwise have covered a civilian pension, an IRA withdrawal or other income. The gain is real but it is not additive. Section 12-6-1170(C)(2) keeps the offset personal on a joint return. For married taxpayers filing a joint federal return, the reduction applies to each individual separately, so a non-military spouse's own retirement deduction is untouched. VA disability compensation, VA pension and military disability retired pay for a service-connected injury never enter the computation, because they are outside federal gross income and South Carolina builds from federal taxable income. Social Security is not taxed by South Carolina at all.