How does South Carolina's Catastrophe Savings Account work — who can open one, how much is deductible, and when are withdrawals taxed?

Plain-English summary

South Carolina gets hit by hurricanes and floods, and insurance deductibles can be steep. To help homeowners self-fund that risk, the state created the Catastrophe Savings Account (CSA) — a special savings account whose contributions are deductible from South Carolina income tax. SC Revenue Ruling #21-11 is a question-and-answer reminder of how it works (Code §§ 12-6-1610 through 12-6-1630, added in 2007).

Who can open one. Only a South Carolina resident individual who owns a qualifying legal residence — the home that receives the 4% assessment ratio under § 12-43-220(c). You may have only one CSA at a time, and joint owners of a home get one CSA for that residence (not one each). The account must be an interest-bearing savings/money-market account labeled "Catastrophe Savings Account." If you sell the home, the CSA can move to the new legal residence.

How much you can contribute (and deduct). The limit depends on your homeowner's-policy deductible:

Contributions are deductible from South Carolina income (§ 12-6-1620), and interest earned in the account is exempt from South Carolina income tax. Over-contribute and you must withdraw the excess and include it in income (but without the 2.5% extra tax). The limit adjusts upward if your deductible or home value rises, but doesn't drop if they fall.

When withdrawals are taxed. A distribution is included in income unless it's used for "qualified catastrophe expenses" (§ 12-6-1630(A)) — expenses from a hurricane, rising floodwater, or catastrophic windstorm event that the Governor has declared an emergency by executive order. Important limits:

• A tornado, severe rain/wind, or hailstorm that is not declared an emergency by the Governor does not qualify — a withdrawal for it is taxable.
• The CSA must be established before the catastrophic event.
• A taxable distribution (excess over qualified expenses, or for a non-qualified purpose) is also subject to an extra 2.5% tax (§ 12-6-1630(D)).

The main exceptions.

• Age 70+ with a policy-based CSA: may withdraw funds for any purpose without income tax — but then can make no further CSA contributions (§ 12-6-1630(E)).
• No 2.5% tax if the taxpayer no longer owns a qualifying residence, is a self-insured person withdrawing at age 70+, or on the death of the taxpayer/surviving spouse; and the required withdrawal of excess contributions isn't hit with it either.
• Death: if the account passes to the surviving spouse, it's not included in the spouse's income (until the spouse later dies); if it passes to anyone else, it's included in that person's income — no 2.5% tax.
• The account is legally protected from attachment, levy, garnishment, or legal process.

What this means for you

South Carolina homeowners

If you own your legal residence (the 4%-ratio home), a CSA is a way to pre-fund your hurricane/flood deductible with pre-tax dollars and tax-free interest. Size your contribution to your policy deductible (or, if self-insured, your home's value), and keep the money for a Governor-declared disaster to keep withdrawals tax-free.

Older homeowners (age 70+)

If your CSA is based on a homeowner's policy deductible, at 70+ you can withdraw the funds for any reason free of South Carolina income tax — but once you do, you can't contribute to a CSA again.

Accountants and tax preparers

Watch three traps: the CSA must exist before the event, only Governor-declared hurricanes/floods/windstorms are "qualified," and non-qualified taxable distributions carry the 2.5% add-on unless an exception applies. Contribution limits key off the homeowner's policy deductible (multiple policies' deductibles can't be aggregated), and the account ties to a 12-43-220(c) legal residence.

Common questions

Q: Who can open a Catastrophe Savings Account?
A: A South Carolina resident individual who owns a qualifying legal residence (the home with the 4% assessment ratio). Only one CSA per residence.

Q: How much can I deduct?
A: It depends on your homeowner's deductible: up to $2,000 (deductible ≤ $1,000), the lesser of $15,000 or twice the deductible (deductible > $1,000), or the lesser of $250,000 or the home's value (self-insured).

Q: Are withdrawals taxed?
A: Only if not used for qualified catastrophe expenses — costs from a hurricane, flood, or windstorm the Governor declared an emergency. Taxable withdrawals also carry an extra 2.5% tax, with exceptions.

Q: Does a tornado or hailstorm count?
A: Not unless the Governor declares it an emergency by executive order. Otherwise a withdrawal to cover that damage is taxable.

Q: What happens to the account when I die?
A: If it goes to your surviving spouse, it's not taxed to them until they later die; if it goes to anyone else, it's included in that recipient's income. No 2.5% additional tax applies.

Citations and references

Statutes (S.C. Code Ann.):

• § 12-6-1610 — CSA definitions ("qualified catastrophe expenses," "qualified deductible," "legal residence")
• § 12-6-1620 — establishing a CSA; contribution limits; interest exemption; legal protection
• § 12-6-1630 — taxation of distributions; 2.5% additional tax; age-70 and death rules
• § 12-43-220(c) — legal residence / 4% assessment ratio; § 12-6-510 — individual income tax rates

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR21-11.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 REVENUE RULING #21-11

SUBJECT: Catastrophe Savings Accounts — Taxability of Contributions and
Withdrawals
(Individual Income Tax)

EFFECTIVE DATE: All periods open under statute.

SUPERSEDES: All previous advisory opinions and any oral directives in conflict
herewith.
REFERENCES: S.C. Code Ann. Section 12-6-1610 (2014)

S.C. Code Ann. Section 12-6-1620 (2014)
S.C. Code Ann. Section 12-6-1630 (2014)
S.C. Code Ann. Section 12-43-220(c) (2014 and Supp. 2020)

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: The purpose of a Revenue Ruling is to provide guidance to the public. It is
an advisory opinion issued to apply principles of tax law to a set of facts
or general category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court decision,
or another Department advisory opinion.

OVERVIEW

Article 11, Chapter 6 of Title 12, was added in 2007 to allow individuals an income tax
deduction for certain contributions to a Catastrophe Savings Account to cover an insurance
deductible or self-insured losses for the taxpayer’s legal residence from certain hurricanes, rising
floodwaters, or other catastrophic windstorm event damage.

With hurricane season approaching and as a result of the increase in catastrophic weather events
in South Carolina and the extensive damage these events have caused in the past, the purpose of

this advisory opinion is to remind individual taxpayers of the tax deduction available for
establishing a catastrophe savings account and the tax consequences of withdrawals.

This question and answer document will address some common issues surrounding the
Catastrophe Savings Account provisions in Code Sections 12-6-1610 through 12-6-1630.

The following terms are defined in Code Section 12-6-1610:

“Qualified catastrophe expenses” means expenses paid or incurred by reason of a major
disaster that has been declared by the Governor to be an emergency by executive order.

“Qualified deductible” means the deductible for the individual’s homeowner’s policy for
a taxpayer’s legal residence.

“Legal residence” means the taxpayer’s legal residence pursuant to Code Section 12-43-
220(c).

For purposes of this advisory opinion, the use of the terms “taxpayer,” “covered catastrophe,”
and “insurance” have the following meaning:

“Taxpayer” means the individual who:

1. Owns the home that meets the legal residence requirements under Code Section 12-
   43-220(c),

2. Is named as an insured on the homeowner’s insurance policy that covers the legal
   residence, if the person is not self-insured, and

3. Established the Catastrophe Savings Account.

“Covered catastrophe” means a hurricane, rising floodwater, or other catastrophic
windstorm event that has been declared by the Governor to be an emergency by executive
order.

“Insurance” means the individual’s homeowner’s policy, unless otherwise noted.

QUESTIONS AND ANSWERS

1. Q. What is a Catastrophe Savings Account (“CSA”)?

A. A CSA is a savings or money market account established by a taxpayer for the specific

purpose of covering the amount of an insurance deductible and other uninsured portions
of risks of loss from a covered catastrophe to the taxpayer’s legal residence. A CSA is
limited to an interest-bearing account. The account must be labeled as a “Catastrophe
Savings Account.” Code Section 12-6-1620(B)(1).

2. Q. Who can establish a Catastrophe Savings Account?

A. ACSA can only be established by the South Carolina resident individual who owns the
property that qualifies as a legal residence under Code Section 12-43-220(c).

A taxpayer can only establish one CSA at a time. Since the CSA is connected to a legal
residence, joint owners of a legal residence may only establish one CSA. For example,
two sisters owning the legal residence may only establish one CSA for that residence —
each sister may not establish a separate CSA. However, if the residence is sold, the CSA
may be used for the new legal residence.

The qualifying requirements for legal residence are set forth in Code Section 12-43-
220(c) and can include:

1. The residence must be the taxpayer’s legal residence and where the taxpayer is
   domiciled at the time of application for the legal residence status to the county
   aSSessor;

2. Neither the taxpayer nor any other member of the taxpayer’s household may claim to
   be a legal resident of another jurisdiction other than South Carolina for any purpose;
   and

3. Neither the taxpayer nor any member of the taxpayer’s household may claim the 4%
   assessment ratio on another residence.

Note: The specific rules for an individual qualifying a residence as a legal residence
eligible for the special 4% assessment ratio in Code Section 12-43-220(c) are complex
and beyond the scope of this advisory opinion.!

3. Q. How much can be contributed to a Catastrophe Savings Account?

A. Code Section 12-6-1620(B)(3) establishes the total amount that an individual may
contribute to a CSA. The total amount that may be contributed depends on the taxpayer’s
deductible amount, if any, for the homeowner’s policy. The total amounts are listed
below.

‘For complete information about the requirements to qualify a residence as a legal residence, contact the
county assessor in which the property is located.

Individuals Qualified Deductible for the Total CSA Contribution’ on the

Homeowner’s Policy on the Legal Residence* Legal Residence
The qualified deductible is $1,000 or less $2,000

. aa: The lesser of $15,000 or twice the
The qualified deductible is over $1,000 qualified deductible
No insurance deductible - the taxpayer is “‘self- The lesser of $250,000 or the value of
insured” the legal residence

*Note: The CSA contribution amount is determined based upon the individual’s
homeowner’s policy deductible only. If a taxpayer has multiple insurance policies with
different deductible amounts based on the catastrophic event (e.g., a general homeowner’s
policy and a separate flood policy), the deductibles for each separate policy cannot be
aggregated to calculate the total CSA contribution amount. See definition of “qualified
deductible” in Code Section 12-6-1610.

Caution: Code Section 12-6-1620(B)(4) provides that a taxpayer who contributes in excess of
the above amounts shall withdraw the amount of the excess contributions and include that
amount in South Carolina income in the year of withdrawal. This amount is not subject to the
2.5% additional tax. (See Question 12.)

4. Q. Is the total contribution to a Catastrophe Savings Account fixed on the date the account is
   established?

A. The total CSA contribution is based on the qualified deductible for the individual’s
homeowner’s policy or the value of the legal residence of a self-insured individual as
explained above in Question 3. If the owner increases the policy deductible or the value
of the residence increases in the case of a self-insured individual, the total CSA
contribution amount is adjusted upward. The total CSA contribution amount, however, is
not lowered if the policy deductible is decreased or the value of the residence decreases.

For example, a taxpayer established a CSA when the homeowner’s insurance policy
deductible was $5,000. The total CSA contribution is $10,000 (the lesser of $15,000 or
twice the deductible). No further contributions are made to, and no distributions are
made from, the CSA. Any interest accrued is not considered in determining the total
contribution amount. The taxpayer later increases his insurance deductible from $5,000 to
$10,000. The total CSA contribution for a deductible of $10,000 is $15,000 (the lesser of
$15,000 or twice the deductible). The taxpayer may make additional contributions up to
$5,000 to the CSA ($15,000 total CSA contribution allowed based on the new deductible
amount less $10,000 of prior contributions).

• Any interest accrued is not considered in determining the total contribution amount.

. Must distributions from a Catastrophe Savings Account be used to only pay for “qualified
catastrophe expenses”?

. While the purpose of a CSA is to cover the amount of insurance deductibles and other
uninsured portions of risks of loss from a hurricane, rising floodwater, or other
catastrophic windstorm event, distributions from a CSA are not limited to qualified
catastrophe expenses. However, a distribution from a CSA must be included in the
taxpayer’s income if the distribution is used to cover nonqualified catastrophe expenses.
Code Section 12-6-1630(A). See Question 10 and the exception in Code Section 12-6-
1630(E) for use of distributions for any reason by certain taxpayers age 70 and older.

. Are distributions from a Catastrophe Savings Account used to pay expenses from damage
caused by any tornado, severe rain and wind storm, or hail storm considered “qualified
catastrophe expenses’”?

. No. Code Section 12-6-1610(1) defines “qualified catastrophe expenses” as expenses
paid or incurred by reason of a major disaster that has been declared by the Governor to
be an emergency by executive order. A distribution from a CSA to pay for expenses for
damage from a major disaster that is not declared an emergency by the Governor must be
included in the taxpayer’s income since the distribution is used to cover “nonqualified”
catastrophe expenses. Code Section 12-6-1630(A).

. Are expenses paid from a Catastrophe Savings Account that was established after the
catastrophic event was declared by the Governor “qualified catastrophe expenses’?

. No. The CSA must be established before the catastrophic event occurs.

. Can the taxpayer continue to contribute to the Catastrophe Savings Account after a
distribution?

. Generally, a taxpayer taking distributions from the CSA may make additional
contributions to the CSA, up to the total contribution limit allowed. See Question 10 for
an exception.

Q. What are the tax consequences of a Catastrophe Savings Account?

. Code Sections 12-6-1620(B) and 12-6-1630 provide the tax rules for contributions to a
CSA, interest earned on the CSA, and distributions from the CSA. The tax consequences
vary and include:

Contributions. An individual taxpayer is allowed an income deduction from the income
tax imposed under Code Section 12-6-510 for amounts contributed to a CSA, up to the
contribution limits allowed in Code Section 12-6-1620(B)(3). See Questions 3 and 4 for
the total contribution amounts allowed.

10. Q.

11.Q.

Interest Income. Interest earned on a CSA is exempt from South Carolina income tax.

Withdrawals (Distributions). Code Section 12-6-1630(A) provides that a distribution
from a CSA is included in income unless the amount of the distribution is used to cover
qualified catastrophe expenses. If the aggregate distributions exceed the qualified
catastrophe expenses during the tax year, then the excess amount (total distributions less
qualified catastrophe expenses) must be included in South Carolina income. Code Section
12-6-1630(C). Further, Code Section 12-6-1630(D) provides that the tax paid attributable
to a taxable distribution must be increased by 2.5% of the amount includable in income.
Exceptions exist to each of these provisions and are discussed in Questions 10, 12, and

13. Additionally, other specific types of distributions may not be subject to South
    Carolina income tax.

Account Legally Protected. A CSA is not subject to attachment, levy, garnishment, or
legal process. Code Section 12-6-1620(B)(2).

What distributions from a Catastrophe Savings Account are not taxable?

The following distributions from a CSA are not included in South Carolina taxable
income:

Distributions Used for Qualified Catastrophe Expenses. No distribution used to cover
qualified catastrophe expenses is included in income. Code Section 12-6-1630(A).

Qualified Expenses are Equal to or Greater than the Total Distributions. No amount is
included in income if the qualified catastrophe expenses of the taxpayer during the tax
year equal or exceed the total distributions during the tax year. Code Section 12-6-
1630(B).

Distribution by a Taxpayer Age 70 or Older who has a Homeowner’s Policy. No amount
is included in income if the distribution is from a CSA established based upon an
individual’s homeowner’s policy deductible (rather than a CSA established by a self-
insured individual) and, if at the time of distribution the taxpayer is at least age 70.

Note: This provision in Code Section 12-6-1630(E) allows the individual to withdraw the
CSA funds for any purpose or expense (disaster related or unrelated to a disaster). If this
provision applies, the 70 or older taxpayer cannot make further contributions to any CSA.

What is the tax on taxable distributions?

Taxable distributions are taxed at the tax rate established in Code Section 12-6-510 (the
general tax rates for individuals). In certain instances, a taxable distribution is also
subject to an additional 2.5% tax, as discussed in Question 12. Code Section 12-6-
1630(D) and (F).

12.Q.

A.

13.Q.

14.Q.

Does the 2.5% additional tax apply to all taxable distributions (e.g., an excess distribution
or a distribution used to cover a nonqualified expense)?

The additional 2.5% tax does not apply to a taxable distribution if:

1. The taxpayer no longer owns a legal residence that qualifies under Code Section 12-
   43-220(C); or

2. The distribution is from a self-insured individual who chose not to obtain insurance
   on his legal residence and the distribution is made on or after the date the taxpayer
   attains age 70; or

3. The distribution is on death of the taxpayer or the surviving spouse. Code Section 12-
   6-1630(D)(2) and (F).

Further, the 2.5% additional tax does not apply to a taxpayer who contributes over the
CSA amount set forth in Code Section 12-6-1620(B)(4) who is required to withdraw the
excess contributions and include the excess in South Carolina income in the year of
withdrawal. See Questions 3 and 4.

What are the tax consequences of a Catastrophe Savings Account when the account
owner dies?

When a person who owns a CSA dies, the tax consequences depend upon who is the
recipient of the account.

If the person receiving the account is the surviving spouse, the income is not included in
the income of the surviving spouse. Upon the death of the surviving spouse, the account
is included in the income of the person receiving it. The 2.5% additional tax does not
apply.

If the person receiving the account is not the surviving spouse, the account is included in
the income of the person receiving it. Code Section 12-6-1630(F).

What records should be kept to substantiate policy deductibles and uninsured losses paid
from a Catastrophe Savings Account?

A taxpayer must maintain documentary evidence to substantiate expenses incurred, such
as receipts, invoices, pictures of damages, or insurance policy information. Receipts

should not be included with the taxpayer’s income tax return, but must be readily
available in the event of a Department audit. Documentation should show the expense
amount, date, and item description.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell
W. Hartley Powell, Director

June 22, 2021
Columbia, South Carolina