What SC taxes, what it does not, the \$15,000 deduction for 65+ residents, the military pay exemption, and how SC compares to the states most Hilton Head buyers are leaving
South Carolina is one of the most retirement-friendly income tax states in the Southeast. For most retirees moving from the Northeast or Midwest, the income tax picture looks dramatically better — not just because of the SC rate structure but because of how aggressively SC exempts or deducts retirement-specific income types. Here is the summary before the details:
| Income Type | SC Treatment |
|---|---|
| Social Security benefits | 100% exempt — not taxed at all |
| Military retirement pay | 100% exempt |
| SC state pension income | 100% exempt |
| Private pension / retirement income (age 65+) | $15,000 individual deduction ($30,000 couple) |
| IRA and 401(k) distributions (age 65+) | $15,000 deduction applies |
| Capital gains | Taxed as ordinary income; 44% exclusion available |
| SC income tax rate (top bracket) | 6.2% (2026); reducing toward 6.0% by 2027 |
SC does not tax Social Security benefits at the state level — period. For a couple each receiving $24,000/year in Social Security ($48,000 combined), the SC exemption saves $2,976/year versus a state with a 6.2% income tax on Social Security. This is immediate, annual, and requires no special filing beyond reporting the amount on the SC return (it simply is not counted as taxable income).
SC allows individuals aged 65 or older to deduct $15,000 of qualifying retirement income from their SC taxable income. For a couple both aged 65+, the combined deduction is $30,000. Qualifying retirement income includes pensions, annuity income, IRA distributions, 401(k) distributions, and other qualified retirement plan income.
South Carolina fully exempts military retirement pay from state income tax. A retired military officer or enlisted member receiving $40,000/year in retirement pay pays $0 in SC state income tax on that income. This is one of the strongest military retirement exemptions in the country and is a significant driver of the large veteran population in the Bluffton/Hilton Head area.
| State | Social Security Taxed? | Top Income Tax Rate | Military Retirement Exempt? |
|---|---|---|---|
| South Carolina | No — fully exempt | 6.2% (declining) | Yes — fully exempt |
| New Jersey | No (NJ exempts SS) | 10.75% | No |
| New York | No (NY exempts SS) | 10.9% | No |
| Connecticut | Partially taxed | 6.99% | No |
| Pennsylvania | No | 3.07% | Yes |
| Illinois | No | 4.95% flat | Yes |
| Ohio | No | 3.5% | Yes (partial) |
| Michigan | No | 4.05% | Partial |
SC's rate structure is higher than some Midwest states, but the combination of the \$15K/\$30K retirement deduction plus Social Security exemption plus military pay exemption typically produces a lower effective tax burden for retirement-income households than the nominal rate suggests.
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