South Carolina taxpayers will pay more in state income taxes this year despite getting federal tax breaks, after the state declined to adopt provisions from the One Big Beautiful Bill Act passed by Congress in 2025. The state’s conformity to the Internal Revenue Code ended December 31, 2024, resulting in differences between federal and state tax calculations that increase state taxable income for some workers, including those who earn tips or overtime.
The South Carolina Department of Revenue confirmed in Information Letter #26-4, revised January 12, 2026, that taxpayers must add back several federal deductions when calculating state taxes. This includes the exclusion of qualified tips and overtime pay, passenger vehicle loan interest deductions, and enhanced standard deductions that increased by $750 for single filers and $1,500 for married couples filing jointly under federal law.
“South Carolina is not doing the no tax on tips and overtime, so they’re adding that back into your income,” said Susan Vatell, a Liberty Tax franchise owner in Carolina Forest. “People that are having a lower tax liability are having a higher one in South Carolina because they’re adding back in the tips and overtime.”
How the Conformity Gap Works
South Carolina uses what tax experts call “static conformity” to the federal tax code, meaning the state legislature must pass new laws to adopt federal changes. Unlike states with rolling conformity that automatically mirror federal rules, South Carolina’s approach creates a lag when major federal tax legislation passes.
The One Big Beautiful Bill Act, signed into law in 2025 as Public Law 119-21, introduced taxpayer-favorable changes that South Carolina has not yet matched. The federal law raised the Section 179 small business expensing limit from $1 million to $2.5 million, excluded qualified tips and overtime from taxable income, and allowed deductions for passenger vehicle loan interest.
According to KPMG’s analysis of the conformity issue, “Taxpayers will need to make conformity adjustments on their South Carolina income tax returns” by adding back these federal benefits when calculating what they owe the state. The Department of Revenue has indicated it may automate some of these adjustments for early filers if the legislature passes retroactive conformity legislation, but no such bill has advanced as of mid-February 2026.
Who Pays More
Service industry workers who receive tips may see higher state taxable income compared to federal returns because the federal tip exclusion does not apply under South Carolina law.Current Under federal law, qualified tips are excluded from taxable income, potentially saving workers thousands in federal taxes. South Carolina requires those same tips to be added back to state taxable income, taxed at rates up to 6 percent depending on income bracket.
Military personnel and federal employees who work overtime face similar treatment. The federal overtime exclusion does not apply for South Carolina purposes, increasing state tax liability for these workers compared to prior years when federal and state calculations aligned more closely.
Taxpayers who itemize deductions face an additional complication. South Carolina Code Section 12-6-1130(2) requires adding back state and local taxes deducted on federal returns, but limits this to the difference between itemized deductions and the standard deduction. With the federal standard deduction now higher under the One Big Beautiful Bill Act, this creates a larger add-back amount for many itemizers.
Tax software companies including TurboTax have updated their programs to flag these add-backs automatically. Users report seeing state tax add-backs of $750 or more for 2025 returns, reflecting both the enhanced federal standard deduction and the state/local tax adjustment required by South Carolina law.
Senior Deductions Remain Unchanged
South Carolina maintains its own deduction for senior citizens that operates independently of federal rules. The state allows a deduction of up to $15,000 for taxpayers 65 and older, unchanged by the federal legislation. Seniors who qualify for this state-specific benefit will see minimal differences from previous years, according to the Department of Revenue.
Business owners claiming enhanced depreciation or Section 179 expensing on federal returns must also make conformity adjustments. The federal increase to $2.5 million in immediate expensing does not apply for South Carolina purposes, requiring businesses to add back the difference between what they claimed federally and what South Carolina allows under the pre-2025 rules.
Pending State Tax Overhaul
South Carolina lawmakers are considering separate legislation that would fundamentally restructure the state’s income tax system starting in 2026. House Bill 4216, last amended May 6, 2025, would replace the current three-bracket system with a two-tier structure charging 1.99 percent on income up to $30,000 and 5.39 percent above that threshold.
The bill would introduce a new South Carolina Income Adjusted Deduction for lower-income filers instead of allowing federal standard or itemized deductions. It also mandates automatic rate reductions in future years if state revenue targets are met, with the stated goal of eventually eliminating the income tax entirely.
According to fiscal analysis by South Carolina Revenue and Fiscal Affairs, the restructuring would reduce state revenue by $6.25 million in fiscal year 2026 and $119.1 million in fiscal year 2027 based on 2024 tax return data. The analysis notes the changes would require “significant revisions to the current tax return processing system” at the Department of Revenue.
As of mid-February 2026, House Bill 4216 remains under consideration and has not been scheduled for a floor vote. If passed, it could interact with any federal conformity legislation in complex ways, potentially requiring taxpayers to navigate both conformity adjustments and a new state tax structure.
Current Filing Status
Tax professionals have noted that, as of mid-February 2026, no conformity legislation has been introduced in the General Assembly. The South Carolina Department of Revenue has indicated that taxpayers should file based on current law.
The General Assembly is currently in session and could consider conformity legislation before adjournment. If retroactive legislation is enacted, the Department of Revenue has stated it would issue updated guidance.
Tax software currently calculates required add-backs under existing state law. The Department has not announced a formal process for handling potential retroactive changes if legislation passes later in the session.
Sources
H.4216: South Carolina Individual Income Tax Restructuring Act | South Carolina Legislature
South Carolina Add Back of State and Local Taxes | TurboTax Community
One Big Beautiful Bill Act (Public Law 119-21) | U.S. Congress