It’s no secret: having kids can be expensive. Everything from diapers and food to toys and clothing can come with a hefty price tag. Any parent who has recently bought an inexplicably expensive “squishy” toy or Pokemon card can attest to that. However, all of this pales in comparison to the cost of education. We’ve previously discussed some of the avenues for saving for your children’s college education like the 529 plan. There is a new option on the horizon for K-12 education, scholarship opportunities buoyed by a new education scholarship tax credit. While it’s still in the discovery phase, let’s break down how it can affect families and businesses.

So what exactly is the federal scholarship tax credit? Beginning January 1, 2027, taxpayers may be eligible for a new federal Scholarship Tax Credit (FSTC) under Internal Revenue Code Section 25F for cash contributions of up to $1,700 to qualified Scholarship Granting Organizations (SGOs). Created by the Big Beautiful Bill in 2025, it’s only available in states that have elected to participate and submitted SGO’s for approval to the IRS. Organizations participating must use the contributed funds to provide scholarships for qualified elementary and secondary education expenses, including tuition, fees, textbooks, school supplies, tutoring services and other educational costs. Married couples filing jointly may each be able to claim a $1,700 credit, for a total credit of $3,400 on the joint return.

Which states are currently participating in this program? They are:

  • Alabama
  • Arizona
  • Arkansas
  • Georgia
  • Indiana
  • Iowa
  • Kansas
  • Louisiana
  • Missouri
  • Montana
  • New Hampshire
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • Utah
  • Virginia

Each state has their own criteria for qualification, based on income, specialized needs and more. Some states already have pre-existing scholarship tax credit programs at the state level, so it’s important to be aware of where the state and federal programs intersect.

What donors need to know in order to qualify for receiving the tax credit is that when you make a contribution to an approved SGO, you must let them know that it’s for the purposes of the tax credit and receive a unique donor number for your records to be used at tax preparation time. According to the IRS, the credit is nonrefundable: it can reduce federal income tax to zero, but any credit exceeding that year’s tax liability is not paid out as a refund. Unused credit may be carried forward for up to five years at the federal level (state programs have their own rules around credit rollover.) State tax credits claimed for the same qualified contributions reduce the amount eligible for the federal credit before the $1,700 per-person cap applies. A donor cannot also claim a federal charitable deduction for the portion of a contribution used for this credit.

For businesses looking to become Scholarship Granting Organizations, you must be a qualifying public charity that awards scholarships to eligible K–12 students. SGOs must meet a 90-percent scholarship spending requirement, keep qualified contributions in separate accounts, and provide scholarships to at least 10 students who do not all attend the same school. They must be on a participating state’s SGO list and meet additional requirements. Whatever contributions donors make can not directly translate into a scholarship for a particular student.

While this tax credit is proposed to begin in 2027, it’s still in a flexible discovery state with potential changes on the horizon. As with any charitable giving, there is obvious potential for fraud, so it’s important to be mindful and do your due diligence about whether an SGO is approved or not. For individuals in states that have opted in to take part in this program, it offers a potential tax credit that can translate to savings at the federal level but there can be confusion around intersecting state and federal options, as well as the myriad of other options for education. If you have any questions about this credit or how this could affect your tax planning, feel free to reach out to a team member today!