What’s new in South Carolina for 2026: Act 110 rewrites the return

For tax year 2026 the SC1040 starts from federal adjusted gross income instead of federal taxable income, replaces the federal standard and itemized deductions with a new South Carolina Income Adjusted Deduction of $15,000, $22,500 or $30,000 that phases out with income, and taxes what is left at 1.99% on the first $30,000 and 5.21% above that. The old 0%, 3% and 6% brackets are gone. The state earned income credit is capped at $200. Social Security, military retirement, the retirement and age-65 deductions and the 44% capital gain deduction are untouched. The state’s own fiscal office estimated that about 43% of returns pay less under the new law, about 23% pay more, and the rest see no change.

The law is H.4216, ratified as Act 110 and signed by Governor McMaster on March 30, 2026. It applies to tax years beginning after December 31, 2025, which means the first return filed under it is the 2026 return due April 15, 2027. The 2025 return, due October 15, 2026 under the automatic extension the South Carolina Department of Revenue granted every filer in March, is figured under the old rules. The Department explained the new law in Information Letter 26-20, issued August 31, 2026.

Change one: the return starts from federal AGI

Through 2025, line 1 of the SC1040 was federal taxable income, the figure after the standard deduction or Schedule A. Whatever the federal return deducted below the line, South Carolina deducted too. From 2026, line 1 is federal adjusted gross income, and the state has added Internal Revenue Code sections 63(b) through (g) to the list of federal provisions it does not adopt. Information Letter 26-20 names the eight deductions that disappear from the state return as a result: the standard deduction, itemized deductions, the senior deduction, the tip deduction, the overtime deduction, the car-loan interest deduction, the qualified business income deduction, and the charitable deduction for non-itemizers.

A homeowner who itemized $38,000 of mortgage interest, property tax and charitable gifts on the federal return gets nothing for them in South Carolina. A sole proprietor’s qualified business income deduction is gone from the state return too, though the state’s own 3% rate on active trade or business income (Form I-335) remains. Anything that reduces federal AGI itself, an IRA or HSA contribution, the deductible half of self-employment tax, student loan interest, still flows through.

Change two: the South Carolina Income Adjusted Deduction

In place of the federal deductions, the SC1040 subtracts the South Carolina Income Adjusted Deduction, which the Department calls the SCIAD. The full amount is $15,000 for single or married filing separately, $22,500 for head of household and $30,000 for married filing jointly or a surviving spouse. It is not a flat figure. It shrinks as federal AGI rises and is gone entirely at the top of each range.

Between the two AGI figures the deduction is reduced by the fraction of the range already used: a single filer at $67,500, halfway through the $55,000 range, keeps half, or $7,500. Any reduction that is not a multiple of $10 is rounded down to the next $10. Part-year and nonresident filers prorate the result by South Carolina AGI over federal AGI. The Department has said it will post a SCIAD calculator on MyDORWAY.

Two things about the SCIAD surprise people. The phase-out is on federal AGI, before the state’s own subtractions, so a retired couple whose Social Security and pension deductions bring their South Carolina income down to almost nothing can still lose part of the SCIAD if federal AGI is over $80,000. And a married couple with $190,000 of AGI has no general deduction at all; under the old law the same couple had at least the federal standard deduction.

The dependent exemption survives. Act 110 did not touch it, and the Revenue and Fiscal Affairs Office’s statement on the signed bill says all other state deductions, exemptions and credits are retained. It was $4,930 per dependent for 2025, doubled for a dependent under age 6; the indexed 2026 figure is to come.

Change three: two brackets, 1.99% and 5.21%

The old schedule had three brackets, 0%, 3% and 6%, indexed each year. Act 110 replaces them with two: 1.99% on South Carolina taxable income under $30,000, and 5.21% on $30,000 and above. The form expresses the upper bracket as 5.21% of taxable income minus $966, which is the same thing: at exactly $30,000 both formulas give $597. The $30,000 line is the same for every filing status; filing status matters on the SCIAD, not the bracket. Information Letter 26-20 says the bracket figure will be indexed annually, so $30,000 is a 2026 number. Note what happened at the bottom: the 0% bracket is gone, so a filer with $3,000 of taxable income who paid nothing under the old law pays $60 under the new one.

Change four: the phase-down trigger, from 2027

The 5.21% rate is written to fall. Beginning with tax year 2027, if the Board of Economic Advisors projects on February 15 that individual income tax revenue will grow at least 5% over the current fiscal year, the top rate drops permanently by an amount calculated to cost the greater of $200 million or 25% of the recurring income tax surplus, rounded to the nearest hundredth of a percent. The cuts continue, in any year the trigger is met, until the top rate reaches 1.99%; the two brackets then merge into one rate, which keeps falling toward 0%. Nothing about this affects the 2026 return. The first possible cut applies to 2027 and will be known after February 15, 2027. One wrinkle for a reviewer: the Department’s April 2026 summary describes the cap as “cannot decrease revenue by more than $200 million,” while Information Letter 26-20 follows the statute’s “greater of” wording.

Change five: the earned income credit is capped at $200

South Carolina’s earned income credit remains 125% of the federal credit and remains nonrefundable, but starting in 2026 it is limited to $200 per return. Under the old law a family with a $2,500 federal credit could use up to $3,125 against South Carolina tax; now the ceiling is $200. Act 110 also wrote new filing thresholds keyed to the SCIAD, $15,000 single, $22,500 head of household and $30,000 joint under 65, higher at 65, so many low-income households no longer file at all. The thresholds are tabulated in South Carolina figures at a glance; the family credits are in Credits and breaks for South Carolina families.

What South Carolina did with the 2025 federal law

Nothing, and for individuals the question has mostly stopped mattering. The state conforms to the Internal Revenue Code as of December 31, 2024, and the 2026 General Assembly did not move that date; H.3368, which would have updated conformity for one year and added a state exclusion for overtime pay, failed in the Senate on March 31, 2026 (verify). But because the 2026 return starts from federal AGI and refuses sections 63(b) through (g) outright, the federal deductions for tips, overtime, seniors, car-loan interest, the $40,000 SALT cap and the non-itemizer charitable deduction would not reach the SC1040 even if the state adopted the 2025 federal law tomorrow. They are below-the-line deductions, and South Carolina no longer looks below the line.

The business items are the ones that still need a state adjustment, because depreciation and expensing change federal AGI itself. Information Letter 26-4 covers the 2025 adjustments; whether the 2027 session updates the conformity date for 2026 business items is open.

For 2025 returns, still being filed through October 15, 2026, the position is different: the old return starts from federal taxable income, so the federal tip, overtime, senior, car-loan and SALT changes are added back under Information Letter 26-4.

Withholding and estimated payments were built on the old law

The Department published the 2026 withholding tables on November 6, 2025, before Act 110 existed, and the 2026 SC1040ES prints the old three-bracket schedule. Act 110 directs the Department to revise the tables; a revised 2026 table had not been confirmed when this was written (verify). So 2026 paychecks were withheld under one law and the return will be figured under another. Wage earners who used to itemize, or whose AGI sits in the SCIAD phase-out, should expect to owe more than usual in April 2027; those who took the standard deduction below $40,000 or $80,000 of AGI will generally get more back.

What did not change

• Social Security and Railroad Retirement benefits: still subtracted in full. Military retirement: still fully deductible.
• The retirement income deduction ($3,000 under 65, $10,000 at 65 and older) and the $15,000 age-65 deduction: unchanged. See South Carolina for retirees.
• The 44% deduction for net long-term capital gain: unchanged.
• Future Scholar 529 contributions: still deductible in full, including contributions made through April 15, 2027 for 2026.
• The two wage earner credit, the child and dependent care credit, the tuition credit, the credit for tax paid to another state: unchanged.
• No local income tax, no estate or inheritance tax, no reciprocity with any state.
• The homestead exemption for homeowners 65 or older, disabled or blind stays at the first $50,000 of value; S.768, which would have raised it, passed the Senate and died in the House.
• No statewide tax question was on the November 3, 2026 ballot; the rewrite was done by statute.