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The Federal Tax Credit Scholarship Program, enacted under the FY2025 reconciliation act (P.L. 119-21), also known as the One Big Beautiful Bill Act, is a federally funded initiative signed into law on July 4, 2025. It provides a nonrefundable tax credit of up to $1,700 for individual taxpayers who contribute cash to qualified Scholarship Granting Organizations (SGOs). These organizations use the funds to provide scholarships for eligible elementary and secondary school students, effective from January 1, 2027.

Example: Jane, a taxpayer in California, donates $1,500 to a qualified SGO in 2027. When she files her taxes in 2028, she claims a $1,500 federal tax credit, reducing her federal income tax liability by that amount.

Individual taxpayers (not corporations) can claim a nonrefundable tax credit for cash contributions to qualified SGOs. The credit is worth 100% of the contribution, up to $1,700 per year, regardless of filing status. Taxpayers cannot claim both this credit and a charitable contribution deduction for the same donation, and the federal credit is reduced by any state tax credit received for the same contribution.

Example: John donates $1,000 to an SGO he can claim a federal tax credit of $1,000 - $500 as long as his federal income tax liability is at least $1000. He cannot also claim the $1,000 as a charitable deduction on his federal taxes.

Scholarships are available to students whose household income is below 300% of their area median gross income and who are eligible to enroll in a public elementary or secondary school. Priority is given to students who received scholarships in the previous year, followed by their siblings, before other eligible students.

Example: Maria, a 7th grader in Miami, lives in a household with an income of $120,000. The area median income in Miami is $50,000, so 300% is $150,000. Maria is eligible for a scholarship because her household income is below this threshold. If she received a scholarship last year, she gets priority over new applicants.

Scholarships can be used for qualified expenses, including:

- Tuition, fees, books, supplies, equipment, academic tutoring, and special needs services related to enrollment or attendance at public, private, or religious schools.

- Room and board, uniforms, transportation, and extended day programs if required by the school.

- Computer technology, equipment, or internet access used by the student and their family during elementary or secondary school years.

Example: Michael, a scholarship recipient, uses his $2,000 scholarship to pay $1,200 for private school tuition, $300 for required textbooks, and $500 for a laptop used for schoolwork, all of which are qualified expenses under the program.

No, scholarships received under this program are excluded from federal income taxation under Internal Revenue Code Section 139K, effective for scholarships received in 2027 and beyond. This applies to all qualifying expenses, including some not covered by the preexisting Section 117 exclusion (e.g., tutoring or dual enrollment fees).

Example: Sarah receives a $3,000 scholarship to cover private school tuition and tutoring. Her family does not need to report this amount as taxable income on their 2027 federal tax return, unlike some other scholarships that might be partially taxable under Section 117.

SGOs are 501(c)(3) nonprofit organizations (not private foundations) that provide scholarships to eligible students. They must spend at least 90% of their income on scholarships, award scholarships to at least 10 students attending different schools, verify student eligibility, and avoid earmarking funds for specific students or providing scholarships to disqualified persons (e.g., those with personal or financial ties to the SGO).

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SGO's that participate in the federal scholarship tax credit programs MUST give 90% of the donations that they receive in scholarships. This effectively prohibits these SGO's from becoming an endowment style scholarship fund where scholarships are given out based on the investment returns from an investment fund.

Example: Light of Christ SGO, a 501(c)(3) nonprofit in Arizona, receives $100,000 in donations. It awards $92,000 in scholarships to 15 students across five different schools, ensuring at least 90% of its income goes to scholarships and verifying each student's eligibility based on income. The other 10% of donations are used for administration costs

State participation is voluntary. States choosing to participate must submit an annual list of qualified SGOs to the Secretary of the Treasury by January 1 each year. SGOs can only use tax credit-supported contributions to provide scholarships to students within the state that recognized the SGO. Residents of nonparticipating states can still claim the tax credit for contributions to SGOs in other states, but students in nonparticipating states cannot receive these scholarships.

Example: Florida opts into the program and submits a list of 10 qualified SGOs to the Treasury by January 1, 2027. An SGO in Florida uses donations to award scholarships to Florida students. A New York resident can donate to a Florida SGO and claim the tax credit, but only Florida students can receive those scholarships.

Unlike state programs, which vary in design (e.g., donor eligibility, tax credit caps, or student requirements like prior public school attendance), the federal program is the first of its kind at the federal level. It uses area median gross income (300%) rather than the federal poverty level to determine student eligibility, and it does not impose additional requirements on students or private schools, such as academic assessments or accreditation.

Example: Arizona's state program requires students to have attended public school previously and caps tax credits at $500 for individuals, while the federal program has no prior public school requirement and offers up to $1,700 in credits with eligibility based on 300% of area median income.

Yes, the law does not prohibit students from receiving scholarships from both federal and state tax credit scholarship programs or other aid programs (e.g., the DC Opportunity Scholarship program). However, it does not specify how these funds interact (e.g., which funds apply first to expenses).

Example: Emma, a student in Georgia, receives a $2,000 federal scholarship for private school tuition and a $1,500 state scholarship for tutoring. She can use both, but her school must determine how to apply the funds to her $5,000 tuition bill, as the law doesn't specify the order of application.

The Joint Committee on Taxation estimates the program will reduce federal revenues by approximately $26 billion from FY2025 to FY2034, with most costs incurred from FY2028 onward. However, any student who private school saves the government entire cost of educating that student. Often $10,000 to $20,000

Example: In 2028, the federal government sees a $2 billion reduction in tax revenue due to taxpayers claiming the scholarship tax credit, contributing to the projected $26 billion cost over the decade. This does not include the saving from not having to educate students who attend private school.

The tax credit is nonrefundable, meaning it can only reduce a taxpayer's income tax liability and cannot result in a refund if the credit exceeds the liability. Unused credits can be carried forward for up to five years. Contributions must be in cash, not securities, to qualify for the credit.

Example: Lisa donates $1,700 to an SGO but has a tax liability of only $1,200 in 2027. She uses the full $1,200 credit to reduce her liability to zero and carries forward the remaining $500 to offset her 2028 tax liability.

The Secretary of the Treasury is required to issue regulations and guidance to administer the program, including rules for SGO eligibility, state submission of SGO lists, and recordkeeping or reporting requirements.

Example: The Treasury issues a regulation in 2026 requiring SGOs to submit annual reports verifying that 90% of their income was spent on scholarships, ensuring compliance with program rules.

Eligibility is based on a household's income being below 300% of the area median gross income, as calculated by the U.S. Department of Housing and Urban Development. For example, in an area with a median income of $60,000, a household income up to $180,000 qualifies; in an area with a $100,000 median, up to $300,000 qualifies. Unlike state programs, this does not vary by household size.

Example: In Santa Clara County, California, with a median income of $195,200, a family of four with an income of $550,000 qualifies for scholarships (because, $550,000 is less than $585,600, or 300% of the median). In Oglala Lakota County, South Dakota, with a median of $32,900, a family with $90,000 income qualifies for scholarships (below $98,700).

The program takes effect on January 1, 2027, with tax credits available for contributions made in tax year 2027, claimable when filing taxes in 2028.

Example: In 2027, Tom donates $1,000 to an SGO. He claims the $1,000 tax credit when filing his 2027 taxes in April 2028, reducing his tax bill accordingly.

The program aims to support elementary and secondary education by incentivizing private donations to SGOs through federal tax credits, enabling eligible students to access scholarships for various educational expenses at public, private, or religious schools.

Example: A low-income family in Ohio uses a $2,500 scholarship to enroll their child in a private school with specialized programs, which they couldn't otherwise afford, fulfilling the program's goal of expanding educational access.

If your state chooses not to participate by submitting a list of qualified SGOs to the Secretary of the Treasury, students residing in your state will not be eligible to receive scholarships funded by federal tax credit-supported contributions. However, residents of nonparticipating states can still claim the federal tax credit for cash contributions made to qualified SGOs in other states that have opted into the program.

Example: Nevada does not opt into the program, so students in Nevada cannot receive federal scholarships. However, a Nevada resident, Mark, donates $1,700 to a qualified SGO in Arizona, which has opted in, and claims the full $1,700 federal tax credit when filing his 2027 taxes.

Yes. Your SGO can start taking pledges even if your state has not opted-in. If your state elects to not opt-in to the Federal Scholarship Tax Credit for now (every year is a new opportunity to opt-in or out), then your donors can still direct their donations to SGO's in states that have opted in. But, if they first pledge to donate to your SGO, then if your State decides to opt-in in the future you will be ready with a list of donors who are already accustomed to utilizing the tax credit. This will make start-up that much easier.

Example: California elects not to opt-in for the 2027 tax year. Amy, a taxpayer in California, donates $1,700 to a qualified SGO in Nebraska (which has opted-in) in 2027. If California choses to opt-in in 2028, Amy (who is already accustomed to using the Federal Scholarship Tax Credit) redirects her 2028 donation to the SGO she supports.