Can South Carolina's retirement income deduction be claimed on a COVID-related retirement plan distribution under the CARES Act, and what happens if the distribution is repaid?

Plain-English summary

When Congress passed the CARES Act in March 2020, it let people pull money out of retirement accounts on favorable terms during the pandemic — a "coronavirus-related distribution" (COVID-related distribution). SC Revenue Ruling #21-12 answers two South Carolina questions: can these distributions qualify for South Carolina's retirement income deduction, and what happens if you pay the money back?

The federal setup (CARES Act § 2202). A qualified individual could take a COVID-related distribution (up to $100,000) from an eligible retirement plan in 2020. Federally it's taxable, but the taxpayer can spread it ratably over three years (2020, 2021, 2022) or include it all in 2020, and it is not subject to the usual 10% early-distribution penalty (IRC § 72(t)). The distribution can also be repaid within three years, which unwinds the tax.

South Carolina adopted it. South Carolina adopted CARES Act § 2202 (retroactively, in Act No. 87 of 2021; see SC Information Letter #21-15), and does not impose IRC § 72(t)'s early-withdrawal penalty. So South Carolina mirrors the federal treatment of these distributions.

Why the retirement income deduction applies. South Carolina's retirement income deduction (Code § 12-6-1170) lets a qualifying taxpayer deduct up to $3,000 of retirement income annually through age 64, and up to $10,000 annually at age 65 and older. The statute defines deductible "retirement income" as otherwise-taxable income not subject to a penalty for premature distribution from qualified plans (IRC §§ 401, 403, 408, 457, and government plans including military retirement). Because a COVID-related distribution is not subject to the § 72(t) penalty, it fits that definition — so it qualifies for the deduction, if the taxpayer otherwise meets § 12-6-1170 (including being the original owner of the plan). Age is measured each December 31 the distribution is included in income. (Example in the ruling: a $30,000 distribution taken at 64 and spread over three years gets a $3,000 deduction in 2020, then $10,000 in 2021 and 2022 as the taxpayer turns 65 and 66.)

Repayment. If you repay the distribution within the three-year window, the amount is treated as never distributed, so federal and South Carolina taxable income are reduced for the years that had included it. If the retirement income deduction you claimed was attributable to the COVID distribution, that deduction is reduced too. The ruling's two examples show the range:

• Example 1 (distribution was the only retirement income, under 65): repayment reduces taxable income by $3,000 and removes the $3,000 deduction that was based solely on the distribution — net change $0, and no amended SC 1040 needed.
• Example 2 (age 65+ with $25,000 of other pension income): repayment reduces taxable income by $10,000, but the $10,000 deduction stays (it was covered by the pension income, not the COVID distribution) — so an amended SC 1040 can produce a refund.

What this means for you

Individuals who took a COVID-related distribution

If you took a coronavirus-related distribution and are otherwise eligible, you can claim South Carolina's retirement income deduction against it ($3,000 under 65, $10,000 at 65+), reducing the South Carolina tax on the distribution. Track which year(s) you're including the income in — the deduction and your age are measured year by year.

Taxpayers who repaid (or plan to repay)

Repayment unwinds the income for the affected years. Whether it also cuts your deduction depends on whether the deduction was tied to the COVID distribution or to other retirement income. If the deduction was based only on the distribution, the income drop and the lost deduction can cancel out (no amended return). If you had other retirement income, you may be due a refund via an amended SC 1040.

Accountants and tax preparers

The linchpin is that South Carolina doesn't adopt IRC § 72(t), so the distribution is "not subject to a penalty for premature distribution" and meets § 12-6-1170's definition of retirement income. Watch the original-owner requirement and the fact that "qualifying individual" can differ between CARES Act § 2202 and § 12-6-1170. This ruling is limited to tax years 2020–2023.

Common questions

Q: Does my COVID-related retirement distribution qualify for South Carolina's retirement income deduction?
A: Yes, if you otherwise meet Code § 12-6-1170 (including being the original owner). Because South Carolina doesn't impose the § 72(t) early-withdrawal penalty, the distribution counts as deductible retirement income — $3,000 under age 65, $10,000 at 65+.

Q: How is the distribution taxed by South Carolina?
A: The same as federally — it's taxable but can be spread ratably over 2020, 2021, and 2022 (or all in 2020), with no early-withdrawal penalty.

Q: What if I pay the money back?
A: Repayment within three years is treated as never distributed, so taxable income drops for the years it was included. If your retirement deduction was based on the distribution, it's reduced too; if it was based on other retirement income, it stays.

Q: Do I have to amend my South Carolina return after repaying?
A: Sometimes. In the ruling's Example 1 the change nets to $0 and no amendment is needed; in Example 2 (with other pension income) an amended SC 1040 can claim a refund.

Citations and references

South Carolina:

• § 12-6-1170 — retirement income deduction ($3,000 through age 64; $10,000 at 65+); definition of "retirement income" (not subject to a premature-distribution penalty)
• § 12-6-510 — individual income tax; Act No. 87 of 2021 — adopting CARES Act § 2202; SC Information Letter #21-15

Federal:

• CARES Act § 2202 (Pub. L. 116-136) — coronavirus-related distributions; IRC § 72(t) (early-distribution penalty, not adopted by South Carolina)
• IRC §§ 401, 403, 408, 457 — qualified retirement plans; IRS Notice 2020-50 — federal guidance on § 2202

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR21-12.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 #21-12
SUBJECT:

Retirement Income Deduction – Applicability to COVID-Related
Distributions from Retirement Plans under the Federal CARES Act of
2020
(Individual Income Tax)

EFFECTIVE DATE: Tax Years 2020 through 2023
REFERENCES:

S.C. Code Ann. Section 12-6-1170 (2014) (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 and
Department personnel. 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.

PURPOSE
The purpose of this Revenue Ruling is to address whether individuals are entitled to the South
Carolina retirement income deduction of $3,000 or $10,000 provided in Code Section 12-6-1170
for COVID-related distributions from eligible retirement plans under Section 2202 of the Federal
Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) 1 and the impact on
any South Carolina retirement income deduction claimed if the COVID-related distribution is
repaid in a direct nontaxable transfer.
OVERVIEW OF FEDERAL CARES ACT SECTION 2202
On March 27, 2020, Congress enacted the CARES Act in response to the COVID pandemic. It
provided significant financial relief and assistance to individuals and businesses, including tax
relief. Section 2202 of the Act, “Special Rules for Use of Retirement Funds,” provides “qualified

1

Public Law 116-136.

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individuals” favorable tax treatment with respect to “coronavirus-related distributions” made in
2020, from an eligible retirement plan, as well as special rollover rules. 2
For federal income tax purposes, the COVID-related distribution is taxable income. Section 2202
allows a COVID-related distribution (not to exceed $100,000) to be included in income ratably
over a 3-year period (2020, 2021, and 2022), or a taxpayer may elect to include all the COVIDrelated distribution in income in 2020, the year of the distribution. Section 2022 also provides
that a COVID-related distribution is not subject to the 10% additional federal tax generally
imposed on early distributions under Internal Revenue Code Section 72(t).
Further, a taxpayer may repay all or part of the amount of a COVID-related distribution to an
eligible retirement plan within a 3-year period beginning on the day after the date on which the
distribution was received. Such repayment is treated as though it were paid in a direct rollover to
an eligible retirement plan and the distribution (all or part) would then not be includable in
federal taxable income.
See Internal Revenue Service Notice 2020-50, issued on June 19, 2020, for detailed guidance on
the federal tax treatment of COVID-related distributions under Section 2202 of the CARES Act.
SOUTH CAROLINA TAX RELIEF TREATMENT OF COVID-RELATED
DISTRIBUTIONS FROM RETIREMENT PLANS UNDER THE CARES ACT
South Carolina has adopted Section 2202 of the CARES Act. 3 South Carolina has not adopted
Internal Revenue Code Section 72(t), and does not impose a penalty for premature distribution.
Accordingly, for South Carolina income tax purposes, the same tax treatment is provided for
COVID-related distributions from eligible retirement plans under the CARES Act as the federal
tax treatment.
SOUTH CAROLINA RETIREMENT INCOME DEDUCTION IN CODE SECTION
12-6-1170
Code Section 12-6-1170(A) provides an annual income tax deduction from South Carolina
taxable income for retirement income to the original owner of a qualified retirement account.
The qualifying taxpayer receiving retirement income may deduct up to $3,000 of such retirement
income annually through age 64, and deduct up to $10,000 of such retirement income annually at
age 65 and thereafter.
Code Section 12-6-1170(A)(2) defines the term “retirement income,” as used in this subsection,
to mean the total of all otherwise taxable income not subject to a penalty for premature
distribution received by the taxpayer or the taxpayer’s surviving spouse in a taxable year from
qualified retirement plans. These plans include:

2

See CARES Act Section 2202(a)(4)(A) for the definition of “coronavirus-related distribution” and Section
2202(a)(4)(A)(ii) for the definition of “qualified individual.” Note: Section 2202 does not apply to all distributions
by individuals during 2020 or to every type of distribution.
3
South Carolina retroactively adopted Section 2202 in Act No. 87 of 2021, enacted May 18, 2021. See Information
Letter #21-15, “COVID-Related Distribution from Retirement Plans Under the Federal CARES Act of 2020.”

2

•

All public employee retirement plans of the federal, state, and local governments,
including military retirement.

• Plans defined in Internal Revenue Code Sections:
401, “Qualified Pension, Profit-Sharing, and Stock Bonus Plan”
403, “Taxation of Employee Annuities”
408, “Individual Retirement Accounts” and
457, “Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations.”
Based on Code Section 12-6-1170, since COVID-related distributions from eligible retirement
plans under the CARES Act are not subject to an early withdrawal penalty under Internal
Revenue Code Section 72(t), a COVID-related distribution from a “qualified retirement plan”
meeting the requirements in Code Section 12-6-1170 is allowed the South Carolina retirement
income deduction. 4 The deduction is up to $3,000 for a qualifying individual under age 65 and
increases to up to $10,000 for a qualifying individual age 65 or older. The age of a qualifying
individual is determined as of each December 31st for which the COVID-related distribution is
included in income.
For example, assume a qualifying individual receives a $30,000 COVID-related distribution in
2020 at age 64, and includes the distribution in income over a 3-year period ($10,000 in 2020,
$10,000 in 2021, and $10,000 in 2022) and assume the individual also meets the requirements in
Code Section 12-6-1170. The taxpayer’s South Carolina retirement income deduction in 2020, at
age 64, is $3,000, and partially offsets the taxable distribution amount. In 2021, at age 65 and in
2022, at age 66, the individual’s retirement income deduction increases to $10,000, and
completely offsets the $10,000 taxable distribution.
REPAYMENT OF DISTRIBUTION – IMPACT ON TAXABLE INCOME AND
RETIREMENT INCOME DEDUCTION
To the extent an individual reports income attributable to a COVID-related distribution (e.g.,
2020 and 2021) and later repays a portion, or all, of it, (e.g., 2022) federal taxable income and
South Carolina taxable income 5 is lowered for the tax years that previously included the
distribution in income (e.g., tax years 2020 and 2021). The previously included income is, in
effect, treated as never distributed. 6 For South Carolina income tax purposes, since the amount
is treated as “never distributed,” the taxpayer would also lower his or her South Carolina
retirement income deduction originally claimed to the extent the repaid distribution was included
in that deduction. The deduction correction, if any, will depend on the facts and circumstances of
each taxpayer, including whether other retirement income eligible for the retirement income
deduction was received in the tax year being adjusted.

4

Caution: The rules for “qualifying retirement income” and “qualifying individual” may differ between Section 2202
of the CARES Act and Code Section 12-6-1170. For example, Code Section 12-6-1170 requires an individual to be
the original owner of the retirement plan to qualify for the retirement income deduction.
5
Federal taxable income is the starting point to determine an individual’s South Carolina taxable income.
6
CARES Act Section 2202(a)(3).

3

Examples best illustrate the South Carolina tax treatment of COVID-related distributions, the
South Carolina retirement income deduction, and the tax implications of repayment of part, or
all, of the COVID-related distribution.
EXAMPLE 1 – COVID-Related Distribution is Taxpayer’s Only Retirement Income –
Individual is under Age 65
Facts and Federal Tax Treatment. Assume Individual X, age 40, received a $9,000 COVIDrelated distribution from a qualifying retirement plan in 2020 in which he was the original owner.
Under the CARES Act provision, X includes the distribution amount in income over a 3-year
period ($3,000 in 2020, $3,000 in 2021, and $3,000 in 2022). During this entire 3-year period, X
is under the age of 65, and is eligible for the $3,000 South Carolina retirement income deduction
amount.
South Carolina Tax Treatment of a 2020 COVID-Related Distribution – Ratable Recognition of
Income on Retirement Distribution and Retirement Income Deduction Allowed. Since federal
taxable income is the starting point of computing South Carolina taxable income and since South
Carolina has adopted the special federal tax relief provision, X’s South Carolina taxable income
includes the $3,000 distribution made in 2020 in income in 2020, 2021, and 2022.
Further, in tax year 2020, X (age 40) is allowed a $3,000 retirement income deduction under
Code Section 12-6-1170. In tax year 2021, X (age 41) is allowed a $3,000 retirement income
deduction. In tax year 2022, X (age 42) is allowed a $3,000 retirement income deduction.
Additional Facts – Distribution Repayment in 2021. In 2021, X repays the $9,000 distribution.
Under the federal rules, X may file an amended 2020 federal return to claim a refund for the tax
attributable to the $3,000 distribution that was included in income in 2020.
South Carolina Tax Treatment in Year of Repayment in 2021– Reduction of Taxable Income and
“Adjustment” to the Retirement Income Deduction. Since X’s federal taxable income is reduced
by $3,000, X’s South Carolina taxable income is also reduced by this $3,000. However, since X
claimed a South Carolina retirement income deduction solely attributable to the COVID-related
distribution, and X repaid the retirement distribution, X no longer had “retirement income” in the
2020 tax year, and is, therefore, not allowed the $3,000 retirement income deduction in 2020.
However, the net change to South Carolina taxable income for tax year 2020 after the
distribution repayment is $0 ($3,000 lower taxable income plus $3,000 lost retirement income
deduction); an amended SC 1040 is not required. No amount of the COVID-related distribution
is included in income in 2021 or 2022 since X repaid the entire $9,000 distribution in 2021.
EXAMPLE 2 – COVID-Related Distribution along with “Other Retirement Income” –
Individual is Age 65 and Older during the 3-Year Income Recognition Period
Facts and Federal Tax Treatment. Assume Individual Z, age 65, received a $30,000 COVIDrelated distribution from a qualifying retirement plan in 2020 in which he was the original owner.
Under the CARES Act provision, Z includes the distribution amount in income over a 3-year
period ($10,000 in 2020, $10,000 in 2021, and $10,000 in 2022). During this 3-year period, the
taxpayer is age 65 or older and is eligible for the increased $10,000 South Carolina retirement
income deduction. Z has other retirement income of $25,000 each year from a pension.
4

South Carolina Tax Treatment of a 2020 COVID-Related Distribution – Ratable Recognition of
Income on Retirement Distribution and Retirement Income Deduction Allowed. Since federal
taxable income is the starting point of computing South Carolina taxable income and since South
Carolina has adopted this special federal tax relief provision, Z’s South Carolina taxable income
includes the $10,000 distribution in income in 2020, 2021, and 2022.
Further, in tax year 2020, Z (age 65) is allowed a $10,000 retirement income deduction under
Code Section 12-6-1170. In tax year 2021, Z (age 66) is allowed a $10,000 retirement income
deduction. In tax year 2022, Z (age 67) is allowed a $10,000 retirement income deduction
amount.
Additional Facts – Distribution Repayment in 2021. In 2021, Z repays the entire $30,000
distribution. Under the federal rules, Z may file an amended federal return for 2020 to claim a
refund for the tax attributable to the $10,000 ratable portion of the distribution that was included
in income in 2020.
South Carolina Tax Treatment in Year of Repayment in 2021– Reduction of Taxable Income and
“No Adjustment” to the Retirement Income Deduction. Since Z’s federal taxable income is
reduced by $10,000, Z’s South Carolina taxable income is also reduced by $10,000. Although Z
claimed a South Carolina retirement income deduction of $10,000, it is not adjusted by the
repayment of the COVID-related distribution. Since Z had $25,000 of retirement income in 2020
from a pension that is eligible for the $10,000 retirement income deduction, Z’s retirement
income deduction was not attributable to the COVID-related distribution and is not reduced.
Accordingly, the net reduction to South Carolina taxable income is $10,000, the amount of the
COVID-related distribution repaid; Z may file an amended SC 1040 to claim a refund of the tax
attributable to the amount of the $10,000 ratable portion of the distribution included in income in
2020 on the originally filed return. No amount of the COVID-related distribution is included in
income in 2021 or 2022 since Z repaid the entire $30,000 distribution in 2021. Z remains eligible
for the $10,000 retirement income deduction in 2021 and 2022 since he has $25,000 of pension
income each year.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/W. Hartley Powell

W. Hartley Powell, Director

September 28
, 2021
Columbia, South Carolina

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