South Carolina's 2026 Income Tax Overhaul: Two Brackets, the New SCIAD, the Lost QBI Deduction and How to Fix Your January 15 Estimate

2026-10-11 · RKube Services

South Carolina's 2026 income tax overhaul: two brackets at 1.99% and 5.21%, the new SCIAD, the lost QBI deduction and how to fix your January 15 estimate.

South Carolina rewrote its individual income tax this year, and most of the people it affects won't see the change until they file in April 2027. Act 110 of 2026, signed March 30, replaces three brackets with two, cuts the top rate, and changes where the state calculation starts. Taxable income now begins with federal adjusted gross income instead of federal taxable income, and a new South Carolina Income Adjusted Deduction (SCIAD) takes the place of the federal standard deduction.

For W-2 employees, new withholding tables do most of the work. For self-employed people and owners of LLCs and S corporations in Charleston, Greenville, Columbia and Rock Hill, the change can move your estimated payments in either direction. This guide covers what changed, who's likely to pay more or less, three worked examples, and what to do before the January 15, 2027 estimate.

Everything here comes from SCDOR Information Letter #26-20, dated August 31, 2026, which applies to tax years beginning after December 31, 2025.

The new SC brackets for 2026

The $966 subtraction keeps the two brackets continuous. At $30,000 of taxable income, both formulas give about $597. Above that, every additional dollar is taxed at 5.21%. For comparison, the SCDOR individual income tax page lists a 6% top rate for 2025, 6.2% for 2024 and 6.4% for 2023.

The bracket amounts are indexed each year using the Chained Consumer Price Index. And starting with tax year 2027, the 5.21% top rate drops further in any year the state's Board of Economic Advisors projects individual income tax revenue to grow at least 5%, continuing until it reaches 1.99%.

The bigger change: starting from federal AGI

Under the old system, South Carolina started with federal taxable income, so every federal deduction below the AGI line flowed straight into the state return. Act 110 decouples South Carolina from Internal Revenue Code Section 63(b) through (g). The letter lists the federal deductions that no longer reduce South Carolina income:

1. Standard deduction
2. Itemized deductions on Schedule A
3. Senior deduction
4. Qualified tip deduction
5. Overtime deduction
6. Car loan interest deduction
7. Qualified business income (QBI) deduction
8. Charitable contribution deduction for non-itemizers

For small business owners, item 7 is the one to notice. The federal QBI deduction lets many sole proprietors, partners and S corporation shareholders deduct up to 20% of their qualified business income. Until 2025 that deduction reduced South Carolina taxable income too. From 2026 it doesn't. A Greenville contractor with $100,000 of qualified business income could have had up to $20,000 of income come back into the South Carolina base that was previously excluded.

Itemizers lose something similar. Mortgage interest, charitable gifts and property taxes on Schedule A no longer reduce South Carolina income. The SCIAD is the only deduction in their place.

How the SCIAD works

The SCIAD depends on filing status and phases out as federal AGI rises:

Inside the phase-out range, the SCIAD is reduced by the fraction (AGI minus the starting amount) divided by the range, which is $55,000 for single filers, $82,500 for heads of household and $110,000 for joint filers. Any reduction that isn't a multiple of $10 rounds down to the next lowest $10. Nonresidents prorate their SCIAD by the share of AGI that's South Carolina income. The SCDOR says it will put a SCIAD calculator on MyDORWAY.

The result: lower-income filers get a deduction roughly as large as the old federal standard deduction. Higher-income filers get a much smaller one, or none, but they also get the lower top rate.

Worked example: three South Carolina filers

These are simplified. They assume all income is South Carolina income and ignore credits, so use them for direction, not as a filed return.

A Rock Hill part-time bookkeeper, single, federal AGI $35,000. AGI is under $40,000, so the full $15,000 SCIAD applies.

A Greenville freelance designer, single, federal AGI $90,000, with a federal QBI deduction. The SCIAD reduction is $15,000 x ($90,000 - $40,000) / $55,000 = $13,636.36, rounded down to $13,630. The SCIAD is $1,370.

A Charleston couple filing jointly, one runs a short-term rental management LLC, federal AGI $150,000. The reduction is $30,000 x ($150,000 - $80,000) / $110,000 = $19,090.91, rounded to $19,090. The SCIAD is $10,910.

Whether each of these people pays more or less than last year depends on what they used to deduct. The Rock Hill filer probably pays less. The Greenville designer, who used to subtract both the standard deduction and QBI, may pay more despite the rate cut. The Charleston couple, if they itemized a large mortgage and charitable gifts, could go either way. That's why you need to run your own numbers instead of assuming "rates went down."

Who should re-check their estimates now

The SCDOR says you must make estimated payments on Form SC1040ES if you expect to owe $100 or more when you file. The 2026 installments were due April 15, June 15 and September 15, 2026, and the last one is due Friday, January 15, 2027. The SCDOR's September 1 news release asked estimated-tax payers to read the information letter before the September payment, and to take their April and June payments into account.

You're the most likely to need a bigger January payment if you:

• are self-employed or own a pass-through business and take a large federal QBI deduction,
• itemize, especially with big mortgage interest or charitable deductions,
• have AGI in or above the SCIAD phase-out range, or
• took the federal tip or overtime deductions and expected them to carry through.

You're more likely to be overpaid if most of your income is under about $40,000 single or $80,000 joint and you used the standard deduction.

Your January 15 checklist

1. Project 2026 federal AGI from your books through September, plus a realistic fourth quarter.
2. Compute your SCIAD from the table above, or use the MyDORWAY calculator once it's live.
3. Apply the 2026 formula to get your projected South Carolina tax.
4. Subtract South Carolina withholding, any pass-through withholding credited to you, and your April, June and September 2026 estimates.
5. Pay the difference with the January 15, 2027 SC1040ES installment through MyDORWAY.
6. Update your W-4 or SC W-4 for 2027 if you also have wages, since the withholding tables were adjusted for the new law.

Other parts of Act 110 to know

• Earned income credit. The South Carolina credit is 125% of the federal EITC, but Act 110 caps it at $200 a year.
• Filing thresholds. A single filer under 65 now files if South Carolina gross income is over $15,000; a joint filer with both spouses under 65 files above $30,000. The thresholds are higher for filers 65 and older.
• Withholding tables. The SCDOR is adjusting them, so employers' payroll systems should pick up the change for wages.

Common questions about South Carolina's 2026 tax changes

Does Act 110 change my 2025 return? No. It applies to tax years beginning after December 31, 2025. Your 2025 return uses the old rules.

I live in Fort Mill and work in Charlotte. Does this matter? Yes. You still file a North Carolina nonresident return for your NC wages and claim a South Carolina credit for tax paid to North Carolina. The new SC calculation changes the SC tax that credit is measured against, so recheck how much SC tax, if any, you'll owe after the credit.

Is the QBI deduction gone federally too? No. The federal QBI deduction still applies on your federal return. South Carolina just doesn't follow it anymore.

Will the top rate keep dropping? It can, starting in 2027, but only in years the revenue test is met. Plan with 5.21% until the SCDOR announces a lower rate.

Do S corporations and partnerships change anything at the entity level? This letter covers the individual income tax. Pass-through income still lands on owners' individual returns, which is where the new brackets, the SCIAD and the QBI decoupling apply.

This guide is general information based on SCDOR Information Letter #26-20 as of October 2026. Your own return depends on your full income picture.

Get your South Carolina estimate right before January 15

RKube Services handles bookkeeping and tax prep for small businesses and self-employed people across the US and Canada, including South Carolina owners in Charleston, Greenville, Columbia and the Rock Hill and Fort Mill area. We keep your books current, so your January estimate is based on real 2026 numbers under the new law. Start with a free scoping call and a 30-day trial: call (984) 234-7030 or reach us through rkubeservices.com.