Did South Carolina exclude the first $10,200 of 2020 unemployment compensation from state income tax, and is unemployment taxable after 2020?

Plain-English summary

For tax year 2020 only, South Carolina lets you exclude the first $10,200 of unemployment compensation per person from state taxable income — but only if your federal adjusted gross income was under $150,000. This matches the federal break created by the American Rescue Plan of 2021, which added Internal Revenue Code § 85(c). South Carolina normally taxes unemployment compensation because it follows IRC § 85, so a state law change was needed to match the federal exclusion.

How South Carolina adopted it: the Governor signed House Bill 4017 on May 18, 2021, specifically adopting the American Rescue Plan's § 85(c) exclusion for tax year 2020. As a result, to the extent unemployment compensation is excluded on your federal return for 2020, it is also excluded for South Carolina income tax for 2020 (federal taxable income is the starting point of the SC1040).

If you already filed: taxpayers who filed their 2020 SC1040 before May 18, 2021 should review the return to confirm the correct amount of unemployment compensation is reflected in federal taxable income. To fix it, file an SC1040 with a Schedule AMD ("Amended Return Schedule") and check the "Amended Return" box on the front of the SC1040. (The letter gives a Department help line, 1-844-898-8542.)

After 2020: the exclusion is a one-year rule. For tax year 2021 and later, unemployment compensation is fully taxable. People receiving unemployment can elect to have South Carolina income tax withheld at 7% or make estimated payments; § 41-39-40(A)(5) lets an individual change a prior withholding election at least once.

What this means for you

If you received unemployment benefits in 2020 and your federal AGI was under $150,000, up to $10,200 of those benefits is not taxed by South Carolina — check whether your 2020 SC1040 already reflects it, and amend if it doesn't. Do not carry this expectation into later years: for 2021 onward, all unemployment compensation is taxable in South Carolina, so consider electing 7% withholding or paying estimates to avoid a surprise balance due.

Common questions

Q: How much 2020 unemployment compensation can I exclude from South Carolina income tax?
A: Up to $10,200 per person, but only if your federal adjusted gross income for 2020 was under $150,000. The rest is taxable.

Q: I filed my 2020 SC1040 before the law passed — what do I do?
A: Review it and, if the excluded amount isn't reflected, amend by filing an SC1040 with a Schedule AMD and checking the "Amended Return" box.

Q: Is unemployment compensation taxable in South Carolina after 2020?
A: Yes. The exclusion applied to 2020 only; for 2021 and later, unemployment compensation is fully taxable. Recipients can elect 7% withholding or make estimated payments.

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/IL21-14.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 125, Columbia, South Carolina 29214-0575

SC INFORMATION LETTER #21-14

SUBJECT:

Unemployment Compensation – Partial Exclusion for 2020
(Income Tax)

DATE:

May 26, 2021

MODIFIES:

SC Information Letter #21-7
SC Information Letter #20-15

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

An Information Letter is a written statement issued to the public to
announce general information useful in complying with the laws
administered by the Department. An Information Letter has no
precedential value.

Overview of Income Tax on Unemployment Compensation
Under Internal Revenue Code Section 85(a), unemployment compensation is included in gross
income and is subject to federal income tax. South Carolina has adopted Internal Revenue Code
Section 85.
On March 11, 2021, Congress enacted the American Rescue Plan of 2021. 1 This law added
subsection (c), “Special Rule for 2020,” at the end of IRC Section 85 to exclude the first $10,200
of unemployment compensation per person from federal income for the tax year 2020, for
taxpayers with an adjusted gross income of less than $150,000. The remaining unemployment
compensation is taxable income.
The purpose of this Information Letter is to inform taxpayers of South Carolina’s adoption of the
federal suspension of tax on a portion of unemployment compensation for tax year 2020.

1

Public Law 117-2.

Federal Unemployment Compensation Taxability – IRC Section 85(c) Special Exclusion
for 2020
The Internal Revenue Service (IRS) announced on May 14, 2021 in IR-2021-111, that it has
identified taxpayers who filed their return prior to the American Rescue Plan becoming law in
March and are reviewing those returns to determine the correct taxable amount of unemployment
income and tax. This could result in a refund, a reduced balance due, or no change to tax (no
refund due nor amount owed). The IRS is making changes automatically in a phased in
approach. The IRS will send taxpayers a notice explaining the corrections, which they should
expect within 30 days of when the correction is made.
South Carolina Unemployment Compensation Taxability – Special Exclusion for 2020. On
May 18, 2021, the Governor signed House Bill 4017 (Act No. Unassigned) to adopt the specific
tax amendment in the American Rescue Plan that added Internal Revenue Code Section 85(c) to
suspend the tax on a portion of unemployment income. House Bill 4017, Section 3, states, in
part:
For tax year 2020, the amendment in the American Rescue Plan of 2021, P.L. 1172 (March 11, 2021) relating to the exclusion from taxable income for tax year 2020
of $10,200 of unemployment compensation for a taxpayer with less than $150,000
in federal adjusted gross income is specifically adopted by South Carolina.
As a result of South Carolina’s adoption of this specific federal tax provision in the American
Rescue Plan, to the extent that unemployment compensation is excluded for federal income tax
purposes for tax year 2020, unemployment compensation is also excluded for South Carolina
income tax purposes for tax year 2020.
South Carolina taxpayers who filed their SC1040 prior to May 18, 2021, should review their
return to determine if the correct amount of unemployment compensation is reported in federal
taxable income, the starting point of the SC1040. To amend a SC1040 for tax year 2020, a
taxpayer should file a SC1040 with a Schedule AMD, “Amended Return Schedule.” The
“Amended Return” box on the front page of the SC1040 must be checked.
Taxpayers with questions concerning how to amend a 2020 Form SC1040 should contact the
Department at 1-844-898-8542 (toll free).
Note - Taxation of Unemployment Compensation after 2020. For tax year 2021 and
thereafter, unemployment compensation is taxable income since the newly added provision in
IRC Section 85(c) is effective for tax year 2020 only. Taxpayers currently receiving
unemployment compensation should review their tax situation to determine if they should elect
to have South Carolina income tax deducted and withheld from unemployment payments at the
rate of 7% or choose to make estimated tax payments. 2 Code Section 41-39-40(A)(5) provides
that an individual is permitted to change a previously elected withholding of income at least
once. See Information Letter #20-15 for additional information.
2

SC Code Section 12-6-3910.

2