A New $1,700 Federal Tax Credit for School Scholarship Donations Starts Jan. 1, With 30 States Opted In

In 30 states, from Alabama and Florida to Utah and Wyoming, nonprofit scholarship groups are getting ready for a new kind of donation on Jan. 1. Starting that day, a taxpayer who gives cash to an approved Scholarship Granting Organization can claim a federal tax credit of up to $1,700, or up to $3,400 for a married couple filing jointly, the Treasury Department and the IRS said in an Oct. 1 announcement. Because it is a credit and not a deduction, it comes straight off the federal income tax a household owes.

The program is formally the Federal Scholarship Tax Credit under section 25F of the tax code, and officials have taken to calling it the Education Freedom Tax Credit. The law behind it is settled. Many of the details on how it runs are still in proposed form.

The 30 states on the IRS list

The credit only works through states that choose to take part. A participating state has to opt in and then hand the IRS a list of scholarship organizations it has approved, according to the agency’s page on participating states, last updated Oct. 22.

That page lists 30 states for 2027: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

The list has grown through the year. A joint Education and Treasury fact sheet released in January counted 23 states. The seven states added since then are Colorado, Florida, Kansas, Kentucky, New Hampshire, North Carolina and Utah. When the fact sheet came out, Treasury Secretary Scott Bessent urged states that had not yet opted in to act right away.

How the $1,700 credit works

The credit is nonrefundable, the IRS said, which means it can bring a household’s federal income tax bill down to zero but will not produce a refund beyond that. Anyone who cannot use the full amount in a given year can carry the unused portion forward for up to five years.

A donor does not have to live in a participating state. The IRS release says taxpayers can contribute to a scholarship organization regardless of their state of residence, as long as the organization appears on a participating state’s list.

There is one overlap to watch. The federal credit is reduced by any state tax credit taken for the same gift, Bob Carlson wrote in a Forbes column on Oct. 21. A state tax deduction for the gift generally does not reduce it.

What is still only proposed

The Oct. 1 package from Treasury and the IRS was a set of proposed regulations, plus companion temporary regulations meant to let states and scholarship groups prepare for 2027. The IRS said taxpayers, states and scholarship organizations may rely on the proposed rules for donations made on or after Jan. 1, 2027.

The public can still weigh in. Comments on the proposed regulations, filed under REG-117199-25, are due Dec. 1, The Tax Adviser reported, and the rules could change before they are made final.

The proposed rules cover reporting and audits for scholarship organizations, IRS portals for states and the groups, and how the program’s income limits are applied. Treasury and the IRS project the program could reach more than 11 million taxpayers and nearly $26 billion in donations a year by 2030, funding up to 2.2 million scholarships annually. Those are government projections, not results.

Which students and expenses qualify

The scholarships go to K-12 students, and a household income limit applies. Under the statute, students are excluded if their household income in the prior year topped 300% of the area median gross income, according to Carlson’s Forbes column. Treasury and the IRS estimate about 96% of children in participating states would fall under that line.

The money is not limited to private school tuition. The IRS lists tutoring, special-needs services, books, supplies, computers and other equipment among the qualifying education expenses. Education Secretary Linda McMahon has said the program gives more families real choices about their children’s schooling.

To qualify, a scholarship organization generally must be a 501(c)(3) public charity, keep these donations separate from its other money and appear on a participating state’s list, the IRS said.

How a donation gets claimed

The paperwork runs through the scholarship organization. Each group must send a donor a written acknowledgment with a unique donor number by Jan. 31 of the following year, and the donor reports that number on Form 8525, Carlson wrote. A gift without the number is presumed not to qualify, though the donor can try to prove otherwise with the acknowledgment or other records.

The donor number system also means scholarship groups do not need donors’ Social Security numbers, the IRS said. That timeline puts the first claims on 2027 federal returns, which most households will file in early 2028.

For a household that already gives to a school scholarship fund, the change is large. A $1,700 gift to an approved organization could cost the donor nothing in federal tax terms, if the household owes at least that much in federal income tax and does not claim a state credit for the same gift.

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This article was produced with AI assistance and edited for accuracy against the sources linked above.

Image: Ente75 – Public domain/Wikimedia Commons