What you need to know about…South Carolina Income Taxes
Author: Lew Wessel | Photographer: Photography by Anne
When the subject of “taxes” comes up, the discussion is almost exclusively focused on federal taxes and the Internal Revenue Code. While these taxes are certainly the 900-pound gorilla in the room, state income taxes, at least in South Carolina, are more than just an annoying no-see-um flitting around that big ape. South Carolina income taxes represent a potentially substantial tax burden and, as Willy Loman’s wife says, “Attention must be paid.” Here is what you need to know…
While South Carolina ranks at 30th in total tax burden as a percentage of income, only 11 states have a higher marginal tax rate than South Carolina’s seven percent (Note: Seven states have no income tax). That top rate of seven percent comes pretty quickly as well, applying to anyone with state taxable income of $13,100 or higher. That’s a bottom-line impact of $700 for every $10,000 in income, which certainly gets my attention.
General income taxation scheme
South Carolina is a conformity state. Essentially, this means that taxable income in South Carolina begins with federal taxable income and then gets adjusted up and down from there by a host of additions and subtractions. The final taxable income number is then multiplied by the state tax rate. The resulting amount is then reduced dollar-for-dollar by any tax credits you have earned.
I’m going to stop here and make a declarative, non-hedged statement: If you live in South Carolina, you need to have your taxes prepared by a South Carolina CPA or other tax professional. This is particularly true if you own a business. I know you love your old CPA Billy Ray from your hometown of Mayberry, North Carolina, but Billy Ray knows North Carolina tax returns, not South Carolina tax returns.
Here’s the dirty secret about tax preparers: They generally know everything there is to know about their own state’s unique tax items and close to nothing about those of other states. Their hope is that their tax software will take all that good information they put in the federal tax return and flow it properly into the state return. Unfortunately, state returns are the weak link in tax software, and errors of omission often occur. In addition, as accurate as tax software may be, it can only compute what you put into it; if your tax preparer doesn’t know the law, you’re going to miss some really good tax savings.
Down to the details
South Carolina, like all states with income taxes, has some very unique additions and subtractions to federal taxable income as well as some interesting (or downright whacky, in my opinion) credits that you need to know. Here are the more important ones:
• Municipal Bond Interest: With certain exceptions, the interest on municipal bonds is tax-free on your federal return. South Carolina, however, does tax this interest unless the municipal bond is issued by the state, one of the counties or some other tax authority within South Carolina (e.g. Beaufort County School Board). All things being equal, municipal interest on a bond issued by a South Carolina authority is worth seven percent more than other municipal bonds. Make this an item for discussion next time you talk to your broker.
• Capital Gains: Perhaps unique to South Carolina is a 44 percent exclusion or subtraction from the capital gains flowing from the 1040 federal return. This effectively reduces the state tax on capital gains from seven percent to 3.92 percent. Note also that South Carolina does not tax the capital gain from the sale of real property, rental property or a business that is located in another state.
• Retirement Income Subtractions: We aren’t the number-one choice of retirees solely because of our weather. The South Carolina tax code is so chock full of goodies for seniors that only the most affluent of that group will pay any state income taxes at all. The most important break for seniors is that South Carolina, like most other states, does not tax Social Security. This fact alone effectively exempts most South Carolina seniors from any state income tax (Note: Per the AARP, Social Security represents at least half of the income of over 60 percent of South Carolinians over 65. It is the only source of income for a full one-third of all South Carolina seniors.)
Unique to South Carolina are these additional goodies directed to seniors: At age 65, an individual is entitled to an appropriately named “Age-65-And-Older-Deduction” of $15,000. If both spouses are 65 or older, the couple gets a $30,000 deduction. But wait, there’s more! If either or both spouse has been widowed and is now receiving a pension payment as a surviving spouse, he or she is entitled to an additional $10,000 or $3,000 retirement deduction. Thus, the potential deduction for a couple over 65 is $50,000 plus any Social Security income! Finally, anyone under 65 receiving retirement income, including disbursements from his/her IRA, is entitled to a $3,000 retirement deduction.
• 529 Plans: A 529 Plan is a qualified education savings account. There is no deduction on the federal return for contributions to the account, but anything earned on investments in the account is never taxed as long as the account is eventually used for tuition and related fees. That’s a good deal, but what makes this savings vehicle such a no-brainer in South Carolina is that we are one of only three states (Colorado and New Mexico are the other two) that allow you to deduct contributions to this account without limit to reduce your South Carolina taxable income. That’s a true cash return of seven percent! In most instances, it makes perfect sense to funnel every tuition payment through the state’s 529 Future Scholar plan. However, here are a few key points to keep in mind:
1. Only contributions to the South Carolina-sponsored Future Scholar plan qualify for the state income tax deduction; on the flip side, your child, or whoever the beneficiary is, does not have to attend a South Carolina college.
2. Contributions are deductible as long as they are made prior to April 15. This is one of those rare tax-saving strategies you can use after the end of the tax year.
3. There is no carryover for excess contributions. Feel free to wipe out all of your South Carolina income tax liability with your 529 deductions, but there’s no point in going any further.
Take credit where credit is due
As a reminder, deductions or subtractions reduce your taxable income while credits actually reduce your tax dollar-for-dollar. Credits are really good to get, and South Carolina has a bunch of really generous ones. Surprisingly, most of these credits are not even mentioned in the SC1040 instructions, and most tax software packages don’t provide the form you need to include them on your return. I guess that’s one way to balance the budget: Keep tax credits a secret! I’ve unveiled a few for you here:
Tuition Tax Credit: South Carolina has a unique refundable tuition tax credit that is available for the select few who meet very precise requirements:
1. The student graduated from a South Carolina high school (Note: Home schooling counts as well as out-of-state prep schools as long as the parents are South Carolina residents; a GED does not…go figure.)
2. The student must enroll within 12 months of graduating high school;
3. The student must attend a South Carolina college and complete 30 credit hours a year (or 15 if enrolled for just one semester);
4. The student cannot be the recipient of a LIFE Scholarship or Palmetto Fellowship; and
5. Umpteen other rules laid out on Form I-319 (e.g. no drug busts allowed).
The credit is up to $850 per student and is refundable; i.e. if you owe nothing prior to this credit, the state will actually cut you a check.
Excess Insurance Premium Credit: This is a big credit of up to $1,250 that is of particular interest to those of us on the coast. The credit amount is the excess of the total insurance bill on your South Carolina residence over five percent of your federal AGI. It has actually been in existence since January 1, 2007, but my guess is that a lot of people who qualify for it never knew to put it on their returns. If you are one of those, you can still get the credit by filing an amended South Carolina return within three years of the original due date. See SC Form TC44.
Residential Retrofit Credit: Another generous credit targeted to the South Carolina coastal areas. Up to $2,500 for expenses you make to protect your home against hurricanes, floods and the rapture (just kidding). Check out SC Form TC43 for specifics.
Drip/Trickle Credit: Officially it’s the “Drip/Trickle Irrigation System Credit,” but the shortened version sounds a lot funnier. Actually, this is a serious effort to promote conservation by offering a credit for a full 25 percent of the cost of a low-pressure, low-volume irrigation system. Maximum credit is $2,500.
Nursing Home Credit: If you pay for anyone’s care in a nursing home, or even in-home care if it’s ordered by a physician, you can take 20 percent of that expense as a credit on your South Carolina tax return. The maximum credit is just $300 per year, but what the heck? By the way, if you’ve never heard of this one, it’s because there isn’t even a form for it; you just write “102 Nursing Home Credit” on the SC1040TC form that goes with your South Carolina tax return.
Premarital Preparation Course Credit: What idiot thought this one up? Fifty dollar credit if you take a “certified” course prior to getting officially hitched. See Form TC-32 (if only just for laughs).
Other Credits: I count nearly 50 credits available to individuals and businesses in South Carolina. Fair Warning: Don’t count on your software automatically picking up any one of them.
The discussion above focused on South Carolina income taxes. Other key tax issues are, of course, estate and gift taxes, property taxes and sales taxes. Fortunately, due to a quirk in the law, Bush’s 2001 tax cut effectively phased out and then eliminated the estate and gift tax in South Carolina. Property taxes, however, as many of you know, are very much in play, and the dollars involved are very significant. You owe it to yourself, particularly if you have just moved into the state, to consult with a local accountant on this issue.
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