South Carolina's New Income Tax Law: What Changes in 2026
On March 30, Governor McMaster signed H.4216, and South Carolina's income tax got its biggest rewrite in decades. Most of the news coverage focused on the politics. Fair enough, that's what news does. But if you live here, the more useful question is the boring one: what actually changes on your return, and is there anything worth doing about it before April 2027 rolls around?
I spent more time inside this bill than I'd like to admit while researching the pass-through entity election earlier this summer, so here's what I found.
The short version
Through 2025, South Carolina had three brackets, 0 percent, 3 percent, and a top rate of 6 percent, and your state calculation piggybacked on your federal taxable income. Meaning the federal standard deduction, or your itemized deductions, reduced your South Carolina bill too.
Starting with tax year 2026, all of that is gone. The new structure:
- Two rates: 1.99 percent on your first $30,000 of taxable income, 5.21 percent on everything above that.
- Your South Carolina return now starts from federal adjusted gross income, not federal taxable income. The federal standard and itemized deductions no longer count for state purposes.
- In their place, there's a new state deduction called the South Carolina Income Adjusted Deduction, or SCIAD. It's $15,000 for single filers, $22,500 for heads of household, and $30,000 for married filing jointly, and that last number is no accident, since it's nearly the same as the federal standard deduction it replaces. The catch is the phase-out: the deduction shrinks once federal AGI passes $40,000 for singles, $60,000 for heads of household, or $80,000 for joint filers, and it's gone entirely at $95,000, $142,500, and $190,000 respectively.
- South Carolina's own deductions survive. The retirement income deductions, the age 65 and older deduction, the dependent exemption, and, importantly for investors, the 44 percent deduction on net long-term capital gains all carry over.
- The state Earned Income Tax Credit, which used to match 125 percent of the federal credit, is now capped at $200.
One more piece of housekeeping, because the years are about to get confusing. None of this touches the 2025 return you haven't filed yet (if you're on extension). The SCDOR granted every taxpayer an automatic extension on those, so your 2025 South Carolina return is due October 15, 2026, under the old rules. The new law applies to 2026 income, filed by April 15, 2027.
The rate went down, the base went up
So yes, the top rate fell from 6 percent to 5.21 percent. But the amount of income that rate applies to got bigger, because the federal standard deduction no longer comes off first. For a married couple, that's over $31,000 of income, previously ignored by SC, that is now taxed.
So the two changes push against each other, and where you land depends on your income. The state's Revenue and Fiscal Affairs Office projected that about 43 percent of filers see a cut. The Institute on Taxation and Economic Policy estimates the deduction swap raises taxes for roughly 23 percent of filers, and here's the twist: the increases fall on two groups. Higher earners lose the federal itemized deductions that used to flow through to the state return and make too much for the SCIAD to replace them, and the lowest-income filers are more likely to see an increase because of the new $200 cap on the state EITC. The rest land close to where they were.
Three simplified examples, using 2025's rules as the comparison and ignoring dependents and other state deductions to keep the math visible:
A married couple with $250,000 of AGI and no kids would have paid about $12,470 to South Carolina under the old structure. Under the new one, about $12,060. A savings of roughly $400. Real money, but a lot smaller than "we cut the top rate" sounds.
A single filer with $40,000 of AGI does even better, relatively speaking. Old rules: about $810. New rules: about $500, because the full $15,000 SCIAD comes off first and everything left lands in the 1.99 percent bracket. A savings of roughly $310.
So who pays more? My guess is mostly higher earners who itemize. Take that same $250,000 couple, but give them $45,000 of federal itemized deductions, mortgage interest, charitable gifts, the capped state taxes. Under the old rules those deductions flowed through, and their South Carolina bill was about $11,660. Under the new rules the deductions don't count and the SCIAD is long gone at their income, so they pay the same $12,060 as everyone else at that AGI. About $400 more than before.
About your paycheck, right now
This part is odd. The SCDOR published its 2026 withholding tables back in November, before the bill passed, so employers have been withholding all year based on a tax structure that no longer exists. As of this writing, months after the signing, revised tables still haven't been issued.
For most people, the old tables withhold a little more than the new law will charge, which just means a somewhat larger state refund in spring 2027. Not a huge deal. If you itemize heavily on your federal return, the opposite can be true, since the state-side value of those deductions is gone, and it's worth a look at your SC W-4 so April doesn't surprise you.
Either way, keep an eye on dor.sc.gov/withholding. When the new tables drop, that's the moment to check a paystub and true things up.
What this means for the planning side
A few things I'm actually thinking about...
Capital gains got slightly cheaper. South Carolina keeps its 44 percent deduction on long-term gains, which means only 56 percent of a long-term gain is taxed. At the old 6 percent top rate, that worked out to an effective state rate around 3.4 percent. At 5.21 percent, it's closer to 2.9 percent. Not a reason to realize gains you weren't going to realize. But if you were already planning to harvest gains, rebalance a taxable account, or do Roth conversions, the state's cut of that decision is a little smaller now.
Charitable gifts and mortgage interest lost their state-side benefit. Under the old system, if you itemized federally, those deductions flowed through and trimmed your South Carolina bill too. They don't anymore. The federal benefit is unchanged, and taxes were never a good enough reason to give on their own, but if you've been counting a state deduction in your giving math, take it out.
Retirees mostly keep their deal. The retirement income deductions and the 65-plus deduction survive, and the lower top rate applies on top of them. If you're living on a mix of Social Security, withdrawals, and taxable investment income, your South Carolina picture likely improved a bit. Worth re-running any Roth conversion plans with the new numbers this fall.
Business owners, nothing moved for you here. The 3 percent rate on active trade or business income is untouched, and the entity-level election I wrote about in the PTET post still works the same way. The gap between the regular rate and the 3 percent rate just got narrower.
Where this is headed
The law also builds in a ratchet. Beginning with tax year 2027, if the state's Board of Economic Advisors projects income tax revenue growth of 5 percent or more, the top rate gets cut again, with each reduction sized to reduce revenue by roughly $200 million or 25 percent of the recurring income tax surplus, whichever is greater, and the new rate announced by February 15. The stated ambition is to keep pushing the rate down over time, and the mechanism backs that up: once the top rate ratchets all the way down to the 1.99 percent bracket, the law's language contemplates that merged rate falling further still, which is why both supporters and critics describe it as a path toward eventually eliminating the income tax.
Whether the triggers fire depends on the economy, so I wouldn't build a plan around rates that don't exist yet. But the direction of travel matters for one thing: if you're weighing decisions that trade today's state rate against a future one, like conversions, the odds lean toward future South Carolina rates being the same or lower, not higher.
What I'd do this year
Honestly, for most people, not much. Glance at your withholding once the new tables come out. If you're retired or your income comes mostly from a portfolio, you could re-run the conversion and gain-harvesting math this fall with the new rates in it. If you give to charity from a South Carolina return that used to itemize, know the state deduction is gone so it doesn't show up as a surprise. And remember your 2025 return is still due this October under the old rules.
But ultimately, the return mechanics fall to your tax preparer. The planning window is now. If you'd like a second set of eyes on how the new law fits your situation, I'm happy to talk.
Sources: SCDOR, "Information about H. 4216" (dor.sc.gov/news/information-about-h-4216); S.C. H.4216 (Act 110, signed March 30, 2026); S.C. Revenue and Fiscal Affairs Office fiscal impact statements for H.4216; Institute on Taxation and Economic Policy analysis of H.4216; SCDOR 2026 Withholding Tax Tables announcement (November 2025).
