Scholarship Tax Credits Are Going National: What To Know

Summary: Beginning in 2027, the Federal Scholarship Tax Credit (FSTC) will provide taxpayers a dollar-for-dollar credit to offset federal income taxes for eligible contributions. Combined with existing state programs, the credit expands opportunities for taxpayers to support educational access through tax-advantaged giving.

Over the past two decades, scholarship contribution tax credit programs have emerged as a unique solution for taxpayers to align financial goals with charitable giving. Individuals and, in some cases, businesses are able to support educational opportunities for K-12 students while receiving valuable tax benefits in return.

Today, these programs operate in numerous states, with a new federal scholarship on the horizon. Beginning in 2027, eligible taxpayers will be able to receive a dollar-for-dollar federal income tax credit for contributions made to qualified Scholarship Granting Organizations (SGOs). With this nationwide opportunity, taxpayers can maximize charitable impacts and tax planning opportunities across state and federal levels.

Understanding scholarship contribution tax credits

Scholarship contribution tax credit programs are designed to encourage private funding for educational scholarships. Taxpayers make contributions to nonprofit SGOs, which are then used to fund scholarships to eligible students, in exchange for state and/or federal tax credits. States have adopted varying implementations of these credits, but the fundamental structure and goal remain the same: to provide students with increased educational access through tax incentives.

Importantly, taxpayers decide which SGO(s) to contribute to, though an SGO must be a 501c3 nonprofit. The SGOs then allocate scholarships, deciding how much each recipient is awarded.

These programs differ from traditional charitable deductions that reduce taxable income. Alternatively, tax credits directly reduce the amount of tax owed, providing a more substantial tax benefit than charitable deductions alone.

Arrival of the Federal Scholarship Tax Credit

Under Internal Revenue Code Section 25F, the Federal Scholarship Tax Credit (FSTC) will become effective January 1, 2027. Individual taxpayers will be able to receive a dollar-for-dollar federal income tax credit for contributions made to qualified SGOs of their choice.

The federal program reflects many of the same principles that have guided state scholarship tax credit programs for years: encouraging private contributions to support K-12 educational expenses while providing taxpayers with a direct tax incentive for participation.

Key features of the FSTC

The federal program contains several features that distinguish it from existing state programs.

1. The credit is equal to 100% of the taxpayer’s qualifying contribution.
2. Individual taxpayers may contribute up to $1,700 annually. Married couples may potentially receive up to $3,400 in credits.
3. The program does not impose an annual contribution limit, meaning the credit is available for all who make qualified contributions (year one is estimated to provide ~$500 million).
4. Taxpayers can claim the credit nationwide, across all 50 states.
5. The credit allows a five-year carryforward for unused amounts.

Important limitations and requirements

While the FSTC is considerably more flexible than many state credits, several limitations apply.

• Corporations and electing pass-through entities are not eligible for the credit; only individual taxpayers may participate.
• States must formally opt into the program before SGOs within those states can award scholarships. The state must also designate an entity to send the list of SGOs to the U.S. Department of Treasury.
• Students must come from households earning less than 300% of the applicable Area Median Gross Income (AMGI), as determined using data published by the U.S. Department of Housing and Urban Development (HUD).
• Scholarships may only be awarded to eligible students within the state where the SGO operates.
• The credit does not permit self-dealing. Taxpayers cannot earmark contributions for a specific student, and SGOs are barred from awarding scholarships to “disqualified persons” (a term borrowed from the private foundation self-dealing rules under §4946), which generally reaches a donor’s own family members.

Additionally, the U.S. Department of Treasury declared in June 2026 that states cannot impose more restrictive SGO-specific requirements than the One Big Beautiful Bill Act (OBBA), at least for the federal program. Therefore, even if a state has more specific requirements (e.g., allowable expenses, scholarship caps) on its state-level credit, these cannot be imposed on the federal credit.

SGO requirements & scholarship rules

It’s important to note that the OBBBA issued specific SGO requirements and scholarship rules unique to the federal credit that may not apply to many state credits. Examples include:

• No cap on scholarship amounts (e.g., one student can receive $1,000, another $10,000)
• 90% of SGO funds must be used to award 10 or more K-12 student scholarships, at least two of whom must attend different schools
• SGOs must prioritize previous-year recipients and siblings of recipients
• Scholarships can pay for expenses related to tuition, fees, room and board, transportation, uniforms, books, supplies, technology, special needs services, tutoring, and extended day programs
• School districts and their public schools cannot be direct recipients of SGO funds

Growing presence of state scholarship tax credits

Long before the OBBBA introduced the FSTC, states were experimenting with programs that encouraged taxpayers to fund educational scholarships for tax savings. Currently, 18 states offer scholarship contribution tax credit programs:

While the details vary state-to-state, many programs share several common characteristics, including:

• Donations to approved nonprofit SGOs
• State tax credits based on the amount contributed
• Scholarship funds distributed to eligible K-12 students
• Eligibility criteria focused on lower-income households or students with specific educational needs

In general, the amount of available credits can differ significantly between states. Some programs base credits on a percentage of the taxpayer’s contribution, while others impose specific annual limits or tie the benefit to a taxpayer’s state tax liability.

How states approach scholarship eligibility

Though the requirements for qualifying scholarship recipients varies, many states restrict eligibility based on special educational needs, geographic factors, or attendance at certain schools. For instance, 15 states currently limit scholarships primarily to students attending private schools, while five states permit scholarship funds to support either private or public school students under certain circumstances.

States also vary in the types of expenses that scholarships can cover, the amount of funding available to individual students, and the annual limits imposed on available tax credits. For taxpayers and advisors, understanding the rules specific to your state remains an important part of evaluating available planning opportunities.

Can taxpayers participate in both state and federal programs?

One of the most significant planning opportunities associated with the new legislation is that taxpayers may participate in both qualifying state and federal scholarship tax credit programs. For taxpayers in states that already offer scholarship contribution tax credits, the FSTC may create an opportunity to support education scholarships through multiple tax-advantaged channels.

Taxpayers should work with a trusted tax advisor to understand how these opportunities interact with their broader tax planning objectives and charitable giving strategies. Because federal regulations are still pending, additional guidance may clarify implementation details.

What happens next?

Taxpayers will be able to begin submitting federal tax credit pledges to their choice qualifying SGOs from January 1^st through December 31^st for 2027 federal taxes. The U.S. Department of Treasury and, more specifically, the Internal Revenue Service (IRS) are responsible for issuing formal regulations governing the program and are expected to issue clearer administrative requirements and participation procedures.

Final thoughts: a new era for scholarship tax credits

State scholarship contribution tax credits have demonstrated how these programs can provide meaningful impacts for students and participating taxpayers. The FSTC builds on this framework with a nationwide opportunity for both students and taxpayers.

With federal guidance continuing to emerge and the variability of state-specific rules, taxpayers should work closely with a trusted tax advisor to establish a compliant and effective giving strategy. Aprio can help you evaluate available scholarship tax credit opportunities, understand how federal and state programs intersect, and identify planning considerations based on your unique tax situation.