Did RR 96-1 continue the full disability-retirement income exclusion after benefits converted to a regular retirement plan?

Plain-English summary

South Carolina Revenue Ruling 96-1 said a permanently and totally disabled person lost the full state deduction for disability retirement income when the benefit changed to the employer's regular retirement plan.

The result was the same whether the conversion was required at normal retirement age or the employee chose it. The Department focused on the statutory word "disability": the full deduction applied to income received under a disability retirement plan, while income from a regular qualified retirement plan fell under a separate, limited retirement-income deduction.

Under the amounts stated in the 1996 ruling, the qualified-plan deduction was generally limited to $3,000 annually or, after the applicable retirement age and election rules, $10,000. The ruling identified qualified plans as specified federal-code plans and public-employee retirement plans, including qualifying military retirement. Those historical amounts and ages should not be used as current limits.

Common questions

Q: Did permanent and total disability by itself preserve the full exclusion? No. The ruling looked at the type of plan paying the benefit after conversion.

Q: Did it matter whether the change to regular retirement was mandatory? No. Mandatory and optional conversions received the same treatment.

Q: Was the regular pension fully taxable with no retirement deduction? Not necessarily. The recipient could use the limited deduction for income from a qualified retirement plan if its requirements were met.

Q: Are the $3,000 and $10,000 amounts current? This page establishes only the amounts stated in the 1996 ruling. Later law and Department guidance must be checked.

Citations and references

• Former S.C. Code Ann. § 12-7-435(g) (total-and-permanent-disability retirement income)
• Former S.C. Code Ann. § 12-7-435(k) (historical qualified-retirement-plan deduction)
• S.C. Code Ann. § 12-6-1170 (recodified provision identified in the ruling)
• Higgins v. State, 307 S.C. 446, 415 S.E.2d 799 (1992), and Smalls v. Weed, 293 S.C. 364, 293 S.E.2d 531 (1987) (statutory-construction principles cited)
• SC Revenue Ruling #22-11 (later comprehensive retirement-deduction guidance)

Subject

Disability Retirement

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR96-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #96-1 (TAX)

SUBJECT:

Disability Retirement
(Income Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-7-435 (Supp. 1994)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1994)
SC Revenue Procedure #94-1

SCOPE:

A Revenue Ruling is the Department of Revenue's official
advisory opinion of how laws administered by the Department
are to be applied to a specific issue or a specific set of facts, and
is provided as guidance for all persons or a particular group. It is
valid and remains in effect until superseded or modified by a
change in the statute or regulations or a subsequent court
decision, Revenue Ruling or Revenue Procedure.

Question:
Will the retirement income of a person who is permanently and totally disabled remain
exempt from South Carolina income taxes under Code Section 12-7-435(g) if such person
is required to, or exercises the option to, change from a disability retirement plan to the
regular retirement plan?
Conclusion:
The retirement income of a person who is permanently and totally disabled is no longer
exempt from South Carolina income taxes under Code Section 12-7-435(g) if such person
changes, whether mandatorily or optionally, from a disability retirement plan to the
regular retirement plan.

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However, such person is entitled to the partial exemption available under Code Section
12-7-435(k) if the income received is from a "qualified retirement plan" as defined in
Code Section 12-7-435(k)(6).
Facts:
Employers may provide to their employees a variety of benefits, including health and
retirement plans. As part of these plans, employers may also provide a pension type plan
for employees who have become permanently and totally disabled, are no longer able to
work, and who have not yet become eligible for retirement.
Under many of these "disability retirement" plans, employees who have become
permanently and totally disabled and are no longer able to work will receive a monthly
annuity. However, once that person reaches the age at which the person would have been
eligible for retirement, the disability retirement plan may terminate and the employer's
regular retirement plan begins paying the employee's pension or the disability retirement
plan converts into the employer's regular retirement plan 1 . This places the person in the
position that person would have been in if the person had not become disabled and had
been able to continue working until eligible for retirement.
The question has arisen as to whether this change in benefit plans changes the taxation of
the person's monthly income received through these plans.
Discussion:
South Carolina's income tax structure follows the federal income tax laws. Federal
taxable income is the starting point in determining a person's state income tax liability.
South Carolina law allows certain additional adjustments, exemptions, and deductions not
allowed under federal law. With respect to disability and retirement income, Code
Section 12-7-435 2 provides in part:
There is allowed as a deduction from South Carolina taxable income of an
individual the following amounts:

Depending on the benefit plans provided by the employer, the employee may also have the
option to change from the disability plan to the regular retirement plan.
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2

The General Assembly, during the 1995 Session, recodified the State Income Tax. The
recodified version has simplified the law by updating language and reorganizing and combining
code sections in a logical manner. This law is effective for taxable years beginning after 1995.
As such, the provisions of Code Section 12-7-435 can be found in Code Section 12-6-1170 for
taxable years beginning after 1995.

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* * * *
(g) The amount received for disability retirement due to permanent and total
disability by any person who could qualify for the homestead exemption
under ' 12-37-250 by reason of being classified as totally and permanently
disabled.

(k)(1) Beginning with the taxable year in which a taxpayer first receives
retirement income, the taxpayer may:
(A)

deduct his retirement income in an amount not to exceed three
thousand dollars annually; or

(B)

elect irrevocably to defer claiming a retirement income
deduction until the taxable year the taxpayer attains the age of
sixty-five years, at which time the taxpayer may deduct his
retirement income in an amount not to exceed ten thousand
dollars annually.

(2)

A taxpayer who does not claim a retirement income deduction before
the taxable year in which he attains the age of sixty-five years is
considered to have made the election allowed pursuant to subitem
(1)(B) of this item.

(3)

A taxpayer who has attained the age of sixty-five years before 1994
is considered to have made the election allowed pursuant to subitem
(1)(B) of this item.

(4)

A taxpayer who in 1993 has not yet attained the age of sixty-five
years and who receives retirement income in 1993 may:
(A)

deduct his retirement income in an amount not to exceed three
thousand dollars annually; or

(B)

elect irrevocably to defer claiming a retirement income
deduction until the taxable year the taxpayer attains the age of
sixty-five years, at which time the taxpayer may deduct his
retirement income in an amount not to exceed ten thousand
dollars annually.

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(5)

The deduction allowed by this item extends to the taxpayer's
surviving spouse and, to the extent the surviving spouse receives
retirement income attributable to the deceased spouse, applies in the
same manner that the deduction applied to the deceased spouse. If
the surviving spouse also has another retirement income, an
additional retirement exclusion is allowed.

(6)

For purposes of this item, "retirement income" means 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 which
include those plans defined in Internal Revenue Code Sections 401,
403, 408, and 457, and all public employee retirement plans of
federal, state, and local governments, including military retirement
for persons with twenty or more years active military duty.

(8)

(A)

For a taxpayer born in the years 1943 through 1959, where
subitems (1), (2), and (4) of this item refer to age sixty-five,
the applicable age is sixty-six.

(B)

For a taxpayer born after 1959, where subitems (1), (2), and
(4) of this item refer to age sixty-five, the applicable age is
sixty-seven.

Therefore, the statute provides two types of deductions for retirement income - one for
the entire amount received under a disability retirement plan and one for $3,000 or
$10,000 (depending on the election made by the retiree) of income received under a
"qualified retirement plan".
It is a general rule that the courts, in the interpretation of a statute, may not
take, strike, or read anything out of a statute, or delete, subtract, or omit
anything therefrom. To the contrary, it is a cardinal rule of statutory
construction that significance and effect should, if possible, be accorded to
every word, phrase, sentence, and part of an act. 73 Am. Jur. 2d, Statutes,
Section 200.
In construing statutory language, the statute must be read as a whole, and
sections which are part of the same general statutory law must be construed
together and each one given effect, if it can be done by any reasonable
construction. Higgins v. State, 307 S.C. 446, 415 S.E.2d 799 (1992).
Smalls v. Weed, 293 S.C. 364, 293 S.E.2d 531 (1987).

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In giving significance to every word, the word "disability" in describing the deduction
allowed under Code Section 12-7-435(g) was inserted in the statute to distinguish the
complete deduction for "disability retirement income" from the deduction for retirement
income from a qualified retirement plan.
In addition, the clear language of the statute only allows the deduction for disability
retirement income. Retirement income received from a qualified retirement plan, as that
term is defined in the statute, may only receive the limited deduction provided for under
Code Section 12-7-435(k).
Therefore, the retirement income of a person who is permanently and totally disabled is
no longer exempt from South Carolina income taxes under Code Section 12-7-435(g) if
such person changes, whether mandatorily or optionally, from a disability retirement plan
to the regular retirement plan.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank, III, Director

January 8
, 1996
Columbia, South Carolina

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