South Carolina: Retirement Haven or Tax Trap?
by Ian Smith |
If you are at or nearing retirement in your federal career, you may be thinking of relocating to a new state. South Carolina is a state that often attracts newcomers with its mild weather, attractive cities, and lots or recreational activities, but look closely at the state’s income tax structure before taking the relocation plunge.
There is no doubt that South Carolina is a pretty part of the country. The weather is mild, and shopping, sightseeing, and recreational opportunities abound in cities such as Greenville, Columbia and Charleston.
Greenville is home to Falls Park on the Reedy River which runs through downtown. The old bridge that crosses the downtown river was torn down in a park renovation a few years ago and a new suspension bridge was erected in its place. Visitors to downtown can find a number of shops, restaurants, and even free WiFi while enjoying spending time eating lunch or just relaxing on a bench in the well maintained gardens that sprawl throughout the park.
Shops in Falls Park
Suspension bridge crossing the Reedy River
Falls Park on the Reedy
Charleston is a historic city with roots dating back as far as the 1600s. The horse drawn carriage tours that operate in the historic downtown section are a great way for visitors to see and learn about the city and its rich history. With numerous shops, restaurants, and a beautiful waterfront, one could spend days in the city and not get bored.
Horse drawn carriage tour in Charleston
Clearly, South Carolina offers would-be residents some enticing opportunities. But what kind of taxes would you face as a retiree relocating to the city? Be sure to look closely.
While you are likely to earn less income in your Golden Years than you did during your working years, you still will draw income from retirement savings and may even have a pension or annuity which means the state’s income tax rules will affect you since retirement income is taxed (Social Security benefits, however, are not taxed).
The individual income tax rates graduate from 3% on taxable income starting at $2,761 up to a top rate of 7% on taxable income exceeding $13,800. That means you’d have to have very little income to avoid paying the state’s top rate. Among states that charge personal income tax, South Carolina ranks 13th nationally.
What about deductions? For retirement income, if you’re under 65, $3,000 in retirement income is exempt. You can take this deduction for income received from any qualified retirement plan. If both spouses receive retirement income, each is entitled to an individual deduction.
From 65 onwards, the deduction per spouse on retirement income is $10,000. This deduction must be offset by any other retirement deduction that is claimed. For taxpayers age 65 and older, the total of the $15,000 per taxpayer. Example: If a taxpayer claims the $10,000 retirement deduction, he or she would only be eligible for $5,000 under the age 65 and older deduction. A surviving spouse may continue to take a retirement deduction on behalf of the deceased spouse.
Some taxpayers 65 and older may not have to file a tax return if they meet certain conditions. An individual is not required to file a South Carolina income tax return who has (1) a single, surviving spouse, head of household federal filing status, or a married, filing separately filing status when the spouse does not itemize deductions and (2) gross income less that the sum of the federal exemption amount, the applicable standard deduction amount, and any age 65 and older deduction for which the taxpayer qualifies.
Further, an individual is not required to file a South Carolina income tax return who has (1) a federal joint filing status and (2) combined gross income of less than the sum of (a) twice the federal exemption amount, (b) the standard deduction if the individual and spouse had the same household at the close of the tax year, and (c) any age 65 and older deduction for which the taxpayer qualifies.
The following are also deductible:
- Disability income for permanent and total disability
- Care of a special needs child
- Interest received from federal obligations
The market value of a legal residence and up to five acres of surrounding land is assessed at 4%. The first $50,000 of fair market value of a primary residence is exempt from local property taxes for residents 65 and older under a homestead exemption.
Your car is taxed as well under personal property tax. Tax rates vary and are determined by the county auditor in each county. Registering the car will cost you $15 for the title fee and $24 every two years for the registration fee. The registration fee drops to $22 if you are 64 years old and $20 for those $65 and older. A driver’s license is $12.50 and is renewable every 5 years on your birthday.
Speaking of driving, South Carolina also imposes a 16 cent per gallon fuel tax that is included in the price paid at the pump.
6% (prescription drugs and unprepared food items exempt); 25 counties impose an additional 1% local option sales tax; a number of counties impose a 2% sales tax. Seniors 85 and older pay 5%, provided they request it and show proof of age at the time of the purchase.
The number of deductions offered to retirees who take up residence in South Carolina coupled with the pretty weather and recreational attractions may indeed be enough convince many people to relocate there during retirement. On the other hand, Florida, another warm weather state with lots of coastlines, has no state income tax whatsoever which would make filing your annual tax returns simpler.
If you choose to relocate during your retirement, you should always consider all options of living in a new state carefully and be sure to consult a financial advisor or tax attorney.
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