Starting January 1, 2027, the new federal scholarship tax credit lets individuals cut their federal income tax by up to $1,700 (up to $3,400 on a joint return) by giving cash to an approved Scholarship Granting Organization (SGO). It is a dollar-for-dollar credit, not a deduction, so a qualifying $1,700 gift can reduce your tax bill by $1,700. The IRS and Treasury released proposed regulations on October 1, 2026, and the details matter: the gift must go to an SGO on an approved state list, you must tell the SGO you want the credit, and you cannot also deduct the same dollars as a charitable gift.
Here is what we know so far, who it helps, and the steps to take if you want to use it on your 2027 return.
What Is the Federal Scholarship Tax Credit?
The credit comes from new Internal Revenue Code section 25F, enacted in 2025 as part of the law the IRS now calls the Working Families Tax Cuts. According to the IRS announcement, it is the first federal tax credit supporting private contributions for K-12 scholarships. The IRS also refers to it as the Federal Scholarship Tax Credit (FSTC); Treasury materials call it the Education Freedom Tax Credit.
The basic idea is simple. You give cash to a qualified SGO. The SGO uses the money to fund scholarships for elementary and secondary students. You then claim a credit on your federal return for the amount you gave, up to the annual cap.
- Credit amount: up to $1,700 per individual per year. Married couples filing jointly can claim up to $3,400, with each spouse claiming based on their own contributions (Treasury FAQ).
- Type of credit: nonrefundable. It can reduce your federal income tax to zero but will not create a refund on its own.
- Carryforward: unused credit can be carried forward for up to five years.
- No itemizing required: you can claim it whether you itemize or take the standard deduction.
Key Numbers and Dates at a Glance
| Item | Detail | Source |
| Maximum credit | $1,700 per person; $3,400 married filing jointly | IRS |
| First eligible contributions | Made on or after January 1, 2027 | Treasury FAQ |
| State opt-in for 2027 | Advance election (Form 15714) by January 1, 2027 | Treasury FAQ |
| State SGO lists due | February 15, 2027 | Treasury FAQ |
| SGO acknowledgment to donors | By January 31 of the following year | Treasury FAQ |
| Where you claim it | Form 8525 on your 2027 return (filed in 2028) | IRS |
| Carryforward | Up to 5 years | IRS |
Who Can Claim the Credit (and Which States Participate)
Any U.S. citizen or resident who makes a qualified cash contribution to an eligible SGO can claim the credit, per the Treasury and Department of Education FAQ. The SGO, however, must be on the list of a state that has chosen to participate.
Participation is voluntary at the state level. Each state (and D.C.) must elect in and identify which SGOs qualify. When the proposed rules came out, Treasury Secretary Scott Bessent said thirty states had opted in. The IRS maintains the current list on its Federal Scholarship Tax Credit page.
One feature surprises many people: according to Treasury, you can give to an SGO in any participating state, even if your own state has not opted in. So a taxpayer in a non-participating state is not automatically shut out; they would simply need to find an approved SGO elsewhere.
What Counts as a Qualified Contribution
Not every gift to a school-related charity qualifies. Based on the proposed regulations and the Treasury FAQ, a qualified contribution generally must be:
- Cash. Stock, property, and other noncash gifts are not mentioned as qualifying; the rules are built around cash contributions.
- Made to an approved SGO. The organization must generally be a 501(c)(3) public charity (not a private foundation), keep scholarship funds properly accounted for, and appear on a participating state’s SGO list.
- Identified as a section 25F contribution. You must tell the SGO at the time of the gift that you intend it to qualify for the credit.
- Not earmarked. You cannot direct your gift to a particular student.
Scholarships funded by these gifts can cover a wide range of K-12 costs, including tuition at public, private (including religious), or charter schools, tutoring, special education services, books, supplies, and certain extended-day programs (Treasury FAQ).
Which students are eligible?
To receive a scholarship, a student must be eligible to enroll in a public elementary or secondary school, and the household’s prior-year income must be no more than 300% of the area median gross income, adjusted for family size. Treasury and the IRS estimate that about 96% of children in participating states would be eligible, although eligibility does not guarantee a scholarship.
How the Credit Interacts With Charitable Deductions and State Credits
This is where planning matters. The federal scholarship tax credit is generous because it is a credit rather than a deduction, but it comes with two important limits:
- No double dipping. You cannot claim a federal charitable deduction for the portion of a contribution used for this credit (Treasury FAQ). If you give more than the credit allows, the excess may be treated as a regular charitable gift, subject to the normal deduction rules.
- State credits reduce the federal credit. If you also claim a state tax credit for the same contribution, the state credit reduces the amount eligible for the federal credit before the $1,700 cap is applied. The proposed rules include an ordering rule the IRS describes as intended to be favorable to taxpayers.
Because the credit is nonrefundable, it only helps if you have federal income tax liability. A retiree or family with little or no tax due may not benefit in the year of the gift, although the five-year carryforward softens that. If you are already reviewing your itemized deductions, our guide to the 2026 SALT deduction and cap increase covers another area where state and federal rules overlap.
Example: What a $1,700 Gift Could Save
Consider a single filer who expects to owe $9,000 in federal income tax for 2027. The comparison below is simplified and assumes the full gift qualifies and no state credit is claimed.
| Scenario | $1,700 to an approved SGO (credit) | $1,700 to another charity (deduction) |
| Tax benefit | $1,700 reduction in tax | Depends on bracket and whether you itemize |
| If in 24% bracket and itemizing | $1,700 | About $408 |
| If taking the standard deduction | $1,700 | Limited to the separate non-itemizer charitable deduction rules |
| Net cost of the gift | About $0 | About $1,292 or more |
Illustration only. Your actual result depends on your total tax, other credits, and final IRS rules.
In other words, for someone with enough tax liability, a gift up to the cap can cost essentially nothing out of pocket after the credit. That is why demand for qualifying SGOs could be high once 2027 begins.
How to Claim the Federal Scholarship Tax Credit Step by Step
- Confirm the SGO is approved. Check the IRS SGO list on the FSTC page before giving.
- Give in 2027 or later. Gifts made in 2026 do not qualify. Contributions must be made on or after January 1, 2027.
- Tell the SGO you want the credit. Say so at the time of the contribution.
- Keep the written acknowledgment. The SGO must send it by January 31 of the following year, and it includes your unique donor number, so you will not need to give the SGO your Social Security number.
- File Form 8525. Claim the credit on your 2027 federal return using the SGO’s information and your donor number.
If you are mapping out giving for the next two years, our checklist of year-end tax planning moves for 2026 can help you decide which gifts make sense before December 31 and which to hold until January. For other recent federal changes, see our roundup of October 2026 tax updates.
What Is Still Uncertain
The rules released on October 1, 2026 are proposed regulations, accompanied by temporary regulations covering state elections, SGO certification, and donor reporting (Federal Register). Proposed rules can change before they are finalized. A few points to watch:
- Which additional states opt in before the January 1, 2027 election deadline.
- How quickly SGOs are certified and added to state and IRS lists.
- Final guidance on how excess contributions and state credits are coordinated on Form 8525.
Frequently Asked Questions
When does the federal scholarship tax credit start?
It applies to qualified cash contributions made on or after January 1, 2027. You will claim it on your 2027 tax return, generally filed in 2028.
How much is the school choice tax credit?
Up to $1,700 per individual per year, or up to $3,400 for married couples filing jointly when each spouse contributes. It is a nonrefundable credit with a five-year carryforward.
Can I donate if my state did not opt in?
Yes, according to Treasury’s FAQ. You can give to an approved SGO in any participating state, regardless of where you live.
Can I deduct the donation and claim the credit?
No. The portion of a contribution used for the credit cannot also be claimed as a federal charitable deduction.
Do I have to itemize to get the credit?
No. The credit is available whether you itemize or take the standard deduction.
Talk With a CPA Before You Give
A $1,700 credit is easy to understand, but coordinating it with state credits, charitable deductions, and your overall tax picture takes some care. If you would like help deciding how this credit fits your 2027 plans, book a free consultation with Aric at CPA Solutions.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
