Understanding the Federal Scholarship Tax Credit for 2027

Starting January 1, 2027, a new federal tax credit will be available to individuals who donate to eligible Scholarship Granting Organizations (SGOs). This program, officially called the Education Freedom Tax Credit by the Treasury and IRS, aims to provide funding for K-12 students, including those attending private schools like Catholic schools. The credit is designed to reward donors, not provide direct aid to families. Understanding the rules and how it works is key for both potential donors and educational institutions.

How the Federal Scholarship Tax Credit Works

The federal scholarship tax credit allows individual taxpayers to claim a nonrefundable tax credit for cash contributions made to qualifying SGOs. A nonrefundable credit means it can reduce your tax liability down to zero, but you won’t get any of it back as a refund if it exceeds your tax bill. For those who cannot use the full credit in one tax year, proposed rules suggest that unused portions can be carried forward for up to five years. This credit was established by Public Law 119-21, which added section 25F to the Internal Revenue Code.

It is important to note that you cannot claim a charitable deduction for the same donation that you claim as a tax credit. If you are eligible for both a state and a federal tax credit for the same contribution, the state credit is applied first. This means the state credit will reduce the amount of your qualifying contribution, and then the federal credit limit will be applied to the remaining amount.

Donor Benefits and Contribution Limits

Individual taxpayers can claim a credit of up to $1,700 for qualifying cash donations to an eligible SGO. For married couples filing jointly, this limit doubles to $3,400, provided each spouse makes a qualifying contribution. The credit directly reduces the amount of federal income tax owed, dollar for dollar.

The temporary regulations for this program took effect on December 1, 2026, just before the credit officially launches on January 1, 2027. Taxpayers and organizations can follow the proposed rules for qualifying contributions made in 2027, as long as they adhere to them completely. Comments on these proposed regulations were due by December 1, 2026.

Student and Scholarship Eligibility

The program aims to support K-12 students who are eligible to enroll in public school and whose household income is at or below 300% of the area median income. Scholarships funded through this program can cover a range of qualifying K-12 educational expenses. This includes private school tuition, tutoring services, and expenses related to special needs, as well as the purchase of books, supplies, and necessary equipment like computers.

The Treasury Department is expected to provide further guidance on what specifically qualifies as a school and which educational expenses are eligible for scholarship funding. Scholarship Granting Organizations must dedicate at least 90% of their income to providing scholarships, according to the proposed rules. Income is defined as gross receipts from all sources before any expenses are deducted. The actual amount of scholarship aid available will depend on how much money these SGOs can raise and distribute.

State Participation and Organization Qualification

The availability and operation of the federal scholarship tax credit are significantly influenced by state participation. States have the option to opt in to the program and identify which SGOs within their borders are eligible. A taxpayer can donate to an SGO in a participating state even if the donor does not reside in that state.

For the 2027 tax year, states were required to make their participation elections by January 1 and submit their lists of eligible SGOs by February 15. Generally, SGOs must be recognized as 501(c)(3) public charities and be listed on the applicable state’s official list. For example, New York announced its participation in the program, potentially making it accessible to millions of students in the state. As of the regulations’ issuance, the Treasury reported that 30 states had opted in, encouraging all states to join. Donors can check the IRS website for lists of participating states and eligible SGOs before making a contribution.

Frequently Asked Questions