Unlocking the Federal Scholarship Tax Credit for Church-Based Education

Courtesy of My Church SGO, the Church SGO experts. www.mychurchsgo.org

Executive Summary

The Federal Scholarship Tax Credit gives individual donors a federal income tax credit of up to $1,700 a year for qualified contributions to Scholarship Granting Organizations (SGOs), starting with contributions made on or after January 1, 2027. It presents a transformative opportunity for churches, private schools, and community organizations to fund K–12 scholarships through tax-incentivized donations. This article explores the mechanics of the nonrefundable credit, the role of Scholarship Granting Organizations (SGOs), and the strategic advantages for churches establishing SGOs and church schools. It offers a roadmap for implementation and highlights the long-term benefits for students, families, and faith communities.

Introduction
Understanding the Federal Scholarship Tax Credit
How SGOs Work
Eligibility and Use of Funds
Strategic Benefits for Churches
Implementation Roadmap
State-Level Considerations
Financial Modeling and Case Study
Risks and Mitigation
Conclusion

1. Introduction

The intersection of faith, education, and public policy has opened a new avenue for church communities to support K–12 students. The new Federal Scholarship Tax Credit gives individual donors a federal income tax credit of up to $1,700 a year for qualified contributions to Scholarship Granting Organizations (SGOs), which in turn fund scholarships for eligible students. This initiative empowers churches to expand their educational missions while offering donors a meaningful way to invest in future generations.

2. Understanding the Federal Scholarship Tax Credit

Key Features

Effective Date: contributions made on or after January 1, 2027
Amount: up to $1,700 per taxpayer per year. Married couples filing jointly are treated as separate taxpayers, so they may potentially claim up to $3,400 on their joint return, provided that each spouse has made qualified contributions of up to $1,700.
Gift size: giving more is allowed; the $1,700 limit applies to the credit, not the gift. Under the proposed rules, a $2,000 qualified contribution earns a $1,700 credit when no State credit applies, subject to the limit of the donor's federal income tax liability.
Type: nonrefundable federal income tax credit; unused credit carries forward for up to five years
Who can claim: individuals who are U.S. citizens or residents; the rules set no donor income limit
Mechanism: the credit equals the donor's qualified contributions for the year, reduced by any State tax credit for them, up to $1,700, and it cannot exceed the donor's federal income tax liability

Donation Scenarios

Lump Sum: Donors make one gift, designated as a qualified contribution when it is made.
Recurring: Smaller gifts through the year, for example monthly or by after-tax payroll deduction where an employer offers it. Each gift counts only if it is designated as a qualified contribution when it is made.

Tax Filing Impact

The donor claims the credit on Form 8525 with their federal income tax return, using the donor number from the SGO's written acknowledgment. The credit cannot reduce federal tax liability below zero. How it affects any one donor's refund or balance due depends on that donor's whole tax situation, so donors should consult a tax professional.

3. How SGOs Work

Definition

SGOs are 501(c)(3) public charities (not private foundations) that a participating State has included on its State SGO list for the year (state opt-in). They:

Collect tax-credit-eligible donations, keeping qualified contributions in a separate account that holds only those contributions and their earnings
Distribute scholarships to eligible K–12 students
Spend at least 90% of their income on scholarships for eligible students by the end of the following taxable year, which leaves at most 10% of that income for administration and other costs

Who Can Start an SGO?

Any of these groups can organize an SGO, but the SGO itself must be a 501(c)(3) public charity, not a private foundation:

Churches
Private schools, and nonprofit foundations that support public schools
Community Organizations (e.g., Rotary, 4-H, sports clubs)

Scholarship Types

SGOs set their own criteria for who gets scholarships and how much money the scholarships are for, within the federal rules on eligibility, priority, and payment; an award may not exceed the expenses it covers.

Rules

No self-dealing. An SGO may not award scholarships to disqualified persons. These are the SGO's officers, directors, and trustees (and anyone with similar powers); anyone who takes part in choosing recipients or setting award amounts; substantial contributors (anyone who gave more than $5,000 to the SGO in its taxable year, if that was more than 2% of the year's contributions); and the family members of all of these: the person's spouse; the ancestors and descendants (any generation, including adopted and step-children) of the person or the person's spouse; the siblings of either and the siblings' descendants; and the spouses of all of these. A person stays disqualified through the end of the SGO's next taxable year after leaving the role. This ensures SGOs operate with integrity and that funds are used solely to support eligible students. In effect, no member of the family, as defined above, of anyone who runs the SGO, helps choose recipients, or is a substantial contributor can receive a scholarship from it.
Minimum of 10 students. Each SGO must give scholarships to 10 or more students in a taxable year. (Students can receive scholarships from multiple SGOs, but SGOs must have systems to keep awards for the same expense from adding up to more than its cost.)
Minimum of 2 different schools. The students who receive scholarships may not all attend the same school. Example: an SGO gives scholarships to 9 students who attend St. Stanislaus elementary school and 1 student who attends Community Catholic High School — this satisfies both the 10-student and the two-school rules.
Income limit. Scholarship recipients must come from households whose income for the calendar year before the application is not greater than 300% of area median gross income, adjusted for family size; the IRS will publish the area figures each year. SGOs are responsible for verifying household income (with income documents, or with a recent letter showing the household takes part in SNAP, TANF, WIC, Section 8 housing, or SSI); the threshold varies from area to area.
K-12 eligible expenses. Qualified expenses follow the Coverdell definition: tuition, fees, academic tutoring, special needs services, books, supplies, and equipment; room and board, uniforms, transportation, and extended day programs when the school requires or provides them; and computer technology and internet access.
Minimum funds disbursed. An SGO must spend at least 90% of its income on scholarships for eligible students by the end of the taxable year after the year it receives that income. Income generally means all of the SGO's gross receipts. An SGO listed by one State whose activities are at least 85% scholarship granting may choose to measure the test on its separate account of qualified contributions instead; an SGO listed by more than one State must have activities that are at least 85% scholarship granting and must measure the test that way, separately for each State's account. That leaves at most 10% of that income for administration (My Church SGO's fee comes out of this 10%). This prevents an SGO from becoming an endowment that lives off investment returns.
Making the State list. To receive qualified contributions that donors can claim the credit for, the SGO must be on a participating State's SGO list for that year and registered on the IRS SGO portal, which supplies the donor-number format the written acknowledgments must use. My Church SGO helps you prepare what your State reviews; the State determines whether your SGO meets the requirements to be listed.
More to come. Treasury and the IRS published temporary and proposed regulations on October 2, 2026. The proposed rules may change before they are made final, and more guidance is coming, including Form 8525, the IRS donor-number format, and guidance on qualified expenses. There is no legally prescribed formula for how much a student should receive, but an award may not exceed the expenses it covers.

Possible award considerations include need-based (family income, number of kids, circumstances) and merit-based (academic or extracurricular excellence). A wise strategy blends these. Whatever the approach, students who had a scholarship for the previous school year, and then students who have a sibling who received a scholarship from the SGO, must get priority. My Church SGO recommends three awarding models, each applied after that priority:

The Community model: 80% of donations split evenly between all eligible applicants; 20% distributed based on need and merit.
The Normal model: 60% split evenly; 40% distributed based on need and merit.
The Charitable model: 40% split evenly; 60% distributed based on need and merit.

4. Eligibility and Use of Funds

Student Eligibility

Household income, for the calendar year before the application, not greater than 300% of area median gross income, adjusted for family size
Eligible to enroll in public elementary or secondary school
Living in a State whose SGO list includes the SGO (with exceptions for some military and Tribal families)

Example (from the proposed rules): where the area median gross income is $100,000, the limit is $270,000 for a household of three (3 × $100,000 × 0.90) and $300,000 for a household of four (3 × $100,000 × 1.00). The IRS will publish the actual area figures.

Qualified Expenses

(i) Tuition, fees, academic tutoring, special needs services (for a special needs beneficiary), books, supplies, and other equipment incurred in connection with enrollment or attendance at a public, private, or religious school;
(ii) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) required or provided by a public, private, or religious school in connection with such enrollment or attendance; and
(iii) Expenses for the purchase of computer technology or equipment or internet access and related services, if used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in school. (Clause (iii) excludes software designed for sports, games, or hobbies unless predominantly educational.)

5. Strategic Benefits for Churches

Mission Alignment. Church schools reinforce faith-based values and increase long-term church engagement among youth.
Scholarship Opportunity. Qualified contributions belong to the SGO, not the church: they are held in the SGO's separate account, and at least 90% of the SGO's income must go to scholarships for eligible students. Within those rules, an SGO helps more families send their kids to Christian school, and church staff can be paid reasonable compensation for the SGO work they do (facilitated by My Church SGO). A staff member who has an officer's powers, or who helps choose recipients, is a disqualified person whose family cannot receive scholarships. Christian schools benefit as scholarship students enroll, which supports staff retention and expansion, innovative classes and teaching methods, and scholarship growth.
Community Impact. Churches can attract new families seeking quality education and spiritual development.

6. Implementation Roadmap

Solicit pledges from church members. A pledge is a donor promising to give to your future SGO once your State lists it and gifts to it can be designated for the credit. A pledge is not a qualified contribution and earns no credit; a gift counts only when it is made and designated. Even if your state does not opt in right away, it is still a good idea to gather as many pledges as you can—and if your state opts in later, you already have your donors ready to go. Pledges can be made and tracked on www.mychurchsgo.org.
Establish a 501(c)(3) SGO. Starting a new 501(c)(3) to handle only these tax-credit donations is highly recommended to avoid compliance issues: qualified contributions must be kept in a separate account, and unless at least 85% of an organization's activities are scholarship granting, the 90% spending test applies to all of its gross receipts.
Register the SGO on the IRS SGO portal. An organization that plans to solicit qualified contributions must register as soon as possible, and preferably before it appears on any State SGO list. We recommend registering before you start soliciting.
Apply to be on your State's SGO list, following your State's procedures.
Collect donations, recording each donor's designation at the time of the gift.
Send each donor a written acknowledgment by January 31, and report qualified contributions to the IRS by February 28.
Accept scholarship applications.
Award scholarships.
Maintain compliance and reporting, including the annual independent audit.

7. State-Level Considerations

Opt-In Requirement. A State must opt in, for each calendar year, before SGOs located there can receive qualified contributions and before students living there can receive these scholarships. However, donors in states that have not opted in can still give to SGOs listed by states that have, and claim the credit.

Political Landscape. The Governor, or another official or body designated under State law, makes the election. A State's election and SGO list cover one calendar year at a time, so an SGO must be on the list each year. Qualified contributions may not be mixed with any other money, including other scholarship funds; they stay in the SGO's separate account.

8. Financial Modeling and Case Study

Example: a 1000-family church where 500 families donate $1,500 each (weekly cost per family ~$29 before any tax credit) raises $750,000 in total donations. If every gift is a qualified contribution and the SGO spends 90% of that income on scholarships, $675,000 funds scholarships—100 students at $6,750 each if split evenly—and up to $75,000 remains for administration. No award may exceed the student's qualified expenses.

Input / Result, then Value

Number of church families: 1000
Average donation: $1,500
Church family participation: 50%
Number of qualified scholarship applicants: 100
Total donated: $750,000
Admin budget (at most 10%): $75,000
Scholarship budget (at least 90%): $675,000
Even-split scholarship per kid: $6,750
Admin budget → Church SGO managers: $58,900
Admin budget → My Church SGO (tiered, per the fee schedule below): $16,100

My Church SGO takes a percentage of donations once donations start. The donation pledge system is free to use with no obligation to My Church SGO. Additional fees may apply depending on compliance costs and features offered (fee structure subject to change).

Total Donations, then My Church SGO Fee (tentative)

$0–$10,000: 5.00%
$10,000–$25,000: 4.00%
$25,000–$50,000: 3.50%
$50,000–$100,000: 3.00%
$100,000–$200,000: 2.50%
$200,000–$400,000: 2.00%
$400,000+: 1.75%

This model shows how a congregation's gifts can fund substantial scholarships.

9. Risks and Mitigation

Potential challenges include the yearly opt-in battle, the initial legal and financial planning required for setup (My Church SGO has you covered), and enrollment fluctuations that may affect scholarship distribution. Mitigation strategies: stay politically aware, use My Church SGO to navigate the maze, and engage legal counsel for compliance with My Church SGO compliance audits, performed by CPAs who specialize in SGO compliance. The rules also require an annual financial and programmatic audit by a qualified independent third party, sent to each State that lists the SGO.

10. Conclusion

The Federal Scholarship Tax Credit is a game-changer for faith-based education. By establishing SGOs, churches can harness federal policy to support students, strengthen communities, and fulfill their spiritual mission. With thoughtful planning and engagement, this initiative can yield lasting rewards for generations to come. Please visit www.mychurchsgo.org for more information.

11. How to Get Started Accepting Pledges

Go to mychurchsgo.org and click on Start.
Click "Start your SGO."
Enter your information and set your password.
Log back in.
Click "Register your church."
Enter your church information.
Submit your church for approval. Your church page goes live once a My Church SGO administrator approves it.
Sign out and wait for your church to be approved by a My Church SGO administrator.
Once approved, search for your church and click "View Church Page."
Your page is live and ready to take pledges. You also get a QR code that links to your page—put it on literature so donors can easily find you.
When signed in as a donor, the "Make a Pledge" button appears. Donors make their pledges there, and you can watch your pledged donations roll in.

Appendix A: Text of the Law

The program is established by Section 70411 of the One Big Beautiful Bill Act (H.R.1, 119th Congress), which adds 26 U.S.C. § 25F — Qualified Elementary and Secondary Education Scholarships and 26 U.S.C. § 139K (excluding qualifying scholarships from gross income). Key provisions: a credit of up to $1,700 per taxpayer per year (the qualified contributions are first reduced by any state credit for them); an "eligible student" is a member of a household with income not greater than 300% of area median gross income and eligible to enroll in public elementary or secondary school; SGOs must be 501(c)(3) public charities that segregate qualified contributions, provide scholarships to 10 or more students who do not all attend the same school, spend at least 90% of income on scholarships, fund only qualified education expenses, give priority to prior-year recipients and then to students who have a sibling who received a scholarship from the SGO, avoid earmarking and self-dealing, and verify household income and size. Unused credit carries forward up to five years. Effective for taxable years ending after December 31, 2026. On October 2, 2026, Treasury and the IRS published temporary regulations (TD 10057, 91 FR 62655, binding from December 1, 2026) and proposed regulations (REG-117199-25, 91 FR 62818). Taxpayers, SGOs, and States may rely on the proposed regulations for contributions made from January 1, 2027, if they follow the parts that apply to them in their entirety and in a consistent manner.

Read the full statutory text at Congress.gov (H.R.1, 119th Congress), and the regulations at the Federal Register: TD 10057 and REG-117199-25. Reviewed against these sources on October 18, 2026. This is general information, not tax advice.