The Federal Scholarship Tax Credit

The guide

The Federal Scholarship Tax Credit, explained in full

Last updated: October 2026

Starting January 1, 2027, you can donate to a scholarship organization and get a federal tax credit for every dollar you give, up to $1,700 a year. The scholarships go to K-12 students for private school tuition, homeschooling costs, tutoring, and more. Here is how the whole thing works.

A note on timing

The Treasury released temporary and proposed regulations on October 1, 2026. The proposed parts are open for public comment until about December 1, 2026, and could change before they are final. Anything below marked proposed reflects those draft rules, not final law. We will update this guide when the final rules come out.

What is the Federal Scholarship Tax Credit?

It is a federal tax credit for people who donate to K-12 scholarship organizations. Congress created it in the One Big Beautiful Bill Act, signed July 4, 2025. It lives in the tax code as Section 25F. Donations that qualify can be made starting January 1, 2027, and the credit is first claimed when donors file their 2027 tax returns in 2028.

Here is the basic flow. A taxpayer donates money to a Scholarship Granting Organization, or SGO. The SGO must be a qualified nonprofit. The SGO uses the money to give scholarships to eligible students. The donor claims a tax credit equal to the donation, up to $1,700 for the year.

How much is the credit?

Up to $1,700 per person, per year. You get a credit for 100% of what you donate to a qualified SGO, capped at $1,700. A credit is not a deduction. A deduction lowers the income you are taxed on. A credit comes straight off the tax you owe, dollar for dollar.

There is an important catch. The credit is nonrefundable. That means it cannot be more than the federal income tax you actually owe. If you owe $1,000 in tax and donate $1,700, your credit is $1,000, not $1,700. The leftover $700 is not lost, though. Unused credit can be carried forward for up to five years.

Donating never makes you richer. If you give $1,700 and get a $1,700 credit, you break even. The point is to direct money you would have paid in taxes toward scholarships instead, at no net cost to you.

Who can claim the credit?

Individual taxpayers. Any individual with federal income tax liability can donate and claim the credit. Corporations cannot. There is no income limit on the donor side. About 120 million tax filers have enough tax liability to claim the full $1,700, according to analysis cited by program supporters.

Proposed regulation

Under the proposed rules, a married couple filing jointly could claim up to $3,400 combined, but each spouse would need to donate $1,700 individually. This is not yet final.

Who can receive a scholarship?

K-12 students in participating states whose household income is at or below 300% of the area median income. Two conditions have to be met.

First, the student must be eligible to enroll in a public elementary or secondary school in their state. That covers nearly all school-age children.

Second, the household income must be at or below 300% of the area median gross income. This is calculated by HUD at the county level, and it is not adjusted for household size. Because the threshold is set this high, roughly 9 in 10 households qualify. Children in foster care and families receiving benefits like SNAP qualify automatically.

The income limit sounds abstract, so here is what it means in practice. In a county where the median income is $70,000, a household earning up to $210,000 qualifies. The exact number depends on your county.

Does my state participate?

Only if your state opted in. Thirty states had opted in as of September 2026. Each state decides whether to participate, and the decision is made fresh every year. Students can only receive scholarships in states that opted in.

Donors are different. You can donate to an SGO in any participating state no matter where you live and still claim the federal credit. So a donor in a state that opted out can give to an SGO in a state that opted in.

See the full list of participating states and what each state requires.

What is an SGO?

A Scholarship Granting Organization is the nonprofit middleman between donors and students. To qualify, an SGO must be a 501(c)(3) public charity. It has to spend at least 90% of the donations it receives on scholarships. It must serve at least 10 students attending more than one school, which means a single private school generally cannot set up its own SGO. It must verify student income, get an independent audit every year, and keep the scholarship money in separate accounts.

One rule matters a lot to donors: you cannot earmark your donation for a specific child. Not your own kid, not your neighbor's kid, not any named student. The SGO decides who gets scholarships within the federal rules.

There is no official list of qualified SGOs yet. States must submit their lists to the IRS by February 15, 2027. Until then, any SGO directory is incomplete.

What can scholarships pay for?

Tuition, tutoring, books, and a wide range of K-12 education expenses. Qualified expenses include private school tuition and fees, tutoring, services for students with special needs, books, supplies, equipment, computers, internet access, and extended-day programs.

Uniforms, transportation, and room and board only count if the school requires or provides them. The program is not private-school-only. Students in public school can use scholarships for extra costs like tutoring and after-school programs.

How do I donate and claim the credit?

The full mechanics are still being finalized, but the shape is clear:

  1. Choose a qualified SGO in a participating state (lists due February 2027).
  2. Donate by cash. The credit only applies to cash gifts, starting January 1, 2027.
  3. Get a written acknowledgment from the SGO.
  4. Claim the credit when you file your 2027 taxes in 2028.

Proposed regulation

The proposed rules describe a new form and a donor identification number system for claiming the credit. Details could change before the rules are final.

Common misunderstandings

What people get wrong about the credit
The misunderstandingThe reality
"It is free money." Donating never makes you better off. At best you break even: $1,700 out, $1,700 off your tax bill.
"I can get $1,700 back no matter what." The credit cannot exceed the tax you owe. If you owe less than $1,700, your credit is smaller (with carryforward for the rest).
"I can donate to my own child's scholarship." No. Earmarking donations for a named student is prohibited.
"The $1,700 is per child." No. It is per individual tax return, per year. It has nothing to do with how many children you have.
"My state opted out, so I cannot take part." As a donor, you can give to an SGO in any participating state. Only scholarship recipients need to live in an opted-in state.
"Only low-income families qualify." The income limit is 300% of area median income, which covers roughly 9 in 10 households.

Key dates

Sources

  1. IRS: Federal Scholarship Tax Credit (FSTC) (accessed October 2026)
  2. Congressional Research Service: Federal Tax Credit Scholarship Program Included in P.L. 119-21 (R48724) (accessed October 2026)
  3. IRS Newsroom: More Than Half the U.S. States Signed Up (IR-2026-76) (accessed October 2026)
  4. EdChoice: 2026 Updated Eligibility Income Limits (300% AMGI data) (accessed October 2026)