Federal Tax Credit Scholarship Program: What It Is, How It Works, and Where It Fits in Your Plan

For families who are thoughtful about both charitable giving and tax strategy, a new federal program may introduce another planning consideration in the years ahead. Beginning with 2027 tax filings, the Federal Tax Credit Scholarship Program is expected to create a way to support K-12 education while receiving a direct federal tax credit.

This new program will allow many taxpayers to redirect up to $1,700 of their federal tax bill each year through state approved Scholarship Granting Organizations (SGOs). This program offers a combination of philanthropic impact, tax efficiency, and educational benefits. 

Think of this as a charitable‑giving enhancer that can complement (not replace) tools like 529 plans and higher‑education credits; the key dependencies are your tax liability, your state’s participation, and the timing/documentation needed to substantiate the credit. In practice, this may be most relevant for families who are already giving to education-focused causes, managing a consistent tax liability, or navigating income that changes from year to year.

1. Understanding the New Federal Tax Credit Scholarship Program

The Federal Tax Credit Scholarship Program was created under Public Law 119-21. It is the first federal tax credit scholarship for K-12 education. Starting in 2027, taxpayers can claim a non-refundable, dollar-for-dollar federal income tax credit for cash contributions made to SGOs. The maximum annual credit is:

• $1,700 per taxpayer
• Carryforward (unused portion of the credit) is allowed for up to five years
• Reduced by any state tax credit received for the same contribution
• Cannot be combined with a charitable deduction for the same dollars

SGOs award scholarships to K-12 students in participating states whose household income is below 300% of the Area Median Income, or AMI, for their location.

Families who receive scholarships do not pay federal income tax on the awards and can use the funds towards a wide range of qualified expenses that are outlined in the section below. 

This program does not allow donors to support their own child’s tuition. The credit supports other students by turning part of your federal tax liability into education funding for families who qualify.

2. How the Program Works

What is State Participation, and is my state participating?

A state must formally opt in before its students can receive scholarships.
Texas announced its intent to participate in December 2025. Scholarships cannot flow to Texas students until the state completes its participation process and submits an official list of SGOs to the United States Treasury.

Until that list is active, Texas residents may still contribute to SGOs in other participating states and receive the federal credit. However, the scholarships will benefit students in those states, not Texas students.

What counts as a qualified contribution?

A qualified contribution must meet these conditions:

• It must be a cash donation
• It must be made to a state approved SGO
• It cannot be directed to a specific student
• It must be documented for tax reporting

What should taxpayers know before claiming the credit?

Donors receive a dollar-for-dollar federal tax credit up to $1,700. Because this is a nonrefundable credit, it can lower your federal tax bill, but it will not generate a refund if the credit exceeds what you owe. In other words, the benefit is limited to your actual tax liability for the year. Any unused amount may be carried forward for five years.

How do SGOs operate?

SGOs must follow strict federal and state rules, including:

• Operating as a 501(c)(3) public charity
• Maintaining separate accounts for contributions that qualify for the federal credit
• Using at least 90% of revenue for scholarships
• Awarding scholarships to students at more than one school
• Verifying household income and eligibility
• Completing annual state certification and reporting requirements

How do families use scholarship funds?

Scholarship dollars are tax-free and may be used for:

• Tuition and required educational fees
• Books, supplies, and classroom equipment
• Tutoring
• Special needs services
• Transportation and uniforms
• Required room and board linked to school attendance
• Computer technology and internet access used for K-12 education

3. Who Qualifies for Scholarships

Eligibility is based on household income below 300% of AMI for the student’s location. Because AMI varies across Texas counties and metropolitan areas, two families with the same income may have different outcomes.

Here are examples using current HUD values:

Location	2025 AMI	300 Percent Threshold
Weatherford, Texas	106,700 dollars	320,100 dollars
Fort Worth, Texas	106,700 dollars	320,100 dollars
Lubbock, Texas	80,000 dollars	240,000 dollars
Katy, Texas	101,100 dollars	303,300 dollars

A student must also be eligible to enroll in a public K-12 school, including charter schools.

4. How This Fits into a Financial Planning or Charitable Strategy

Families can incorporate this tax credit into their financial plan by using it to optimize charitable giving, manage annual tax liability, and strengthen education related strategies that support children, grandchildren, or the broader community.

a. Enhancing Charitable Giving Efficiency

Many affluent families already give to education related causes. Directing the first $1,700 of that giving to an SGO can convert a deduction that may or may not provide tax value into a credit that directly reduces federal tax liability.

This can be especially helpful for families who do not regularly itemize or who are limited by the state and local tax cap.

b. Managing Cash Flow and Tax Liability

The ability to carry unused credit amounts forward for up to five years can help:

• Families with variable income
• Business owners with fluctuating taxable profit
• Retirees with irregular income events
• Couples who want to maximize credit use across two taxpayers

c. Working Alongside Education Savings Tools

This credit complements, rather than replaces, tools like 529 plans or Coverdell ESA accounts. 

Because SGO scholarships help reduce current education expenses for eligible families, they can preserve 529 balances for future needs.

For more information on education savings vehicles, see our blog post Strategies to Save For Future Education Costs.

d. Multigenerational Philanthropy

Grandparents and extended family members often want to support education in a flexible way. Contributing to an SGO allows them to participate in educational giving without making direct gifts to minors or navigating gift tax limitations.

It can also become part of a family legacy strategy that includes donor advised funds, education endowments, and long-term charitable planning.

The Federal Tax Credit Scholarship Program offers a new way for families to support education while receiving a meaningful federal tax benefit. State participation remains the lynchpin: if your state opts in, local students can benefit; if it doesn’t, you may still donate and claim the credit, but scholarships won’t reach students in your state. With key definitions and oversight details still being finalized by Treasury and the IRS, our team will keep monitoring rulemaking, state opt‑ins, SGO compliance standards, and how this interacts with state aid, so we can help you decide when and how this credit fits within your charitable giving and education plan. 

If you are already giving to education-focused causes or navigating changes in your tax picture, this may be a conversation worth having. Ready to see whether the new scholarship tax credit belongs in your financial plan? Contact our team, and we will help you build a strategy that supports your education and charitable giving goals, so you can stay focused on what matters most.

Sources

https://www.educationprogress.org/p/the-1700-question?r=49ngm1&utm_medium=ios&triedRedirect=true

https://www.huduser.gov/portal/datasets/il.html#data_2025

https://alec.org/model-policy/the-great-schools-tax-credit-program-act-scholarship-tax-credits/

www.congress.gov/bill/119th-congress/house-bill/1/text 

www.schoolchoiceusa.org/sgos