The One Big Beautiful Bill Act created the first federal school choice tax credit in U.S. history: the Federal Scholarship Tax Credit (FSTC). Starting with tax year 2027, individual taxpayers in participating states can claim a dollar-for-dollar federal tax credit of up to $1,700 per year for contributions to qualifying scholarship organizations that fund K-12 education. Here is what you need to know about how the credit works, which states are participating, and how it differs from other education tax benefits.
What Is the Federal Scholarship Tax Credit?
The Federal Scholarship Tax Credit is a nonrefundable federal income tax credit created under Section 70411 of the One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025. It is codified under Internal Revenue Code Section 25F.
The credit works like this: you make a cash contribution to a state-approved Scholarship Granting Organization (SGO) -- a nonprofit that distributes scholarships to K-12 students. In exchange, you receive a dollar-for-dollar federal tax credit reducing your federal income tax bill, up to $1,700 per taxpayer per year.
Married couples filing jointly can each claim the credit on the same return, for a combined maximum credit of $3,400 per year.
When Does It Take Effect?
The credit takes effect for tax years beginning after December 31, 2026. That means the first year anyone can claim the credit is 2027, on returns filed in 2028. Contributions made before January 1, 2027 do not qualify, even if the donation is made to a qualifying SGO in a participating state.
Who Can Claim It?
The credit is available only to individual U.S. citizens and residents. Businesses and corporations cannot claim the Federal Scholarship Tax Credit. There are no income limits -- the credit is available at any income level.
However, there is an important limitation: the credit is only available if you are donating to an SGO in a state that has opted into the program. If your state has not opted in, your donation to an out-of-state SGO may still qualify for the federal credit, but your state's own scholarship credit rules and any state tax treatment will differ.
Which States Are Participating?
State participation is voluntary. Governors or designated state officials can elect to participate on an annual basis by submitting a list of qualified SGOs to the federal government. As of June 2026, the IRS announced that 27 states have elected to participate in the program for 2027. Several governors have formally opted out, and some states where governors vetoed participation bills had their vetoes overridden by state legislatures.
If your state is not participating, students in your state cannot receive scholarships funded under this program. However, donors in non-participating states can still contribute to SGOs in participating states and claim the federal credit.
What Are Scholarship Granting Organizations (SGOs)?
SGOs are state-approved nonprofits that collect donations and distribute scholarships to eligible K-12 students. To be a qualified SGO for purposes of the federal credit, the organization must meet requirements set by both the state and the IRS, including proper certification status. Not every private school scholarship organization automatically qualifies.
Scholarships from qualifying SGOs can be used for tuition, fees, and related expenses at private or public schools. Students must come from households earning no more than 300% of the area median gross income and must be eligible to enroll in K-12 schools.
Key Credit Rules
There are several rules that govern how the credit works in practice:
No double benefit
Contributions you claim for the Federal Scholarship Tax Credit cannot also be deducted as a charitable contribution on Schedule A. You cannot double-dip. If only part of your contribution generates a credit, the remaining uncredited portion may still be deductible as a charitable gift, subject to the standard AGI limits for charitable deductions.
State credit offset
If you are in a state that also offers its own scholarship tax credit (such as Arizona or Georgia, which have long-established state programs), your federal credit is reduced by the amount of any state credit you receive for the same contribution. The two credits cannot fully stack.
Carryforward
Unused credits can be carried forward for up to five years. If your federal income tax liability is zero in the year you make the contribution, you can apply the unused credit against future years' tax bills.
Nonrefundable
The credit is nonrefundable, meaning it can reduce your federal tax bill to zero but cannot generate a refund on its own. If the credit exceeds your tax liability, the excess can be carried forward (see above).
How Does This Compare to a 529 Plan?
A 529 plan is a state-sponsored savings account that grows tax-free and can be used for qualified education expenses. Contributions to a 529 are not federally deductible (though many states offer a state income tax deduction). The Federal Scholarship Tax Credit works differently -- you are not saving for your own child's education; you are donating to an organization that gives scholarships to qualifying students. In return you get a dollar-for-dollar federal tax credit, which is more valuable than a deduction.
The key practical difference: a 529 is for your family. The Federal Scholarship Tax Credit benefits families who receive scholarships from the SGO you fund. Whether a contribution to an SGO makes sense for your tax situation depends on your state's participation, your federal tax liability, and your charitable giving priorities.
What to Do Now
Since the credit does not take effect until 2027, there is no action to take on your 2025 or 2026 tax returns. However, if you are planning ahead, here is what to keep in mind:
- Confirm your state is participating in the program for 2027. Check your state's department of revenue or the IRS OBBBA guidance page for the current list of participating states.
- Identify qualified SGOs in your or another participating state. These must meet IRS and state certification requirements -- not all scholarship nonprofits qualify.
- Make contributions after January 1, 2027 to qualify for the credit.
- Keep records of your donations. You will need documentation from the SGO showing the amount contributed and its qualified status.
- Account for any state credit you receive, since it will reduce your federal credit dollar for dollar.
Key Facts Summary
- Credit amount: up to $1,700 per taxpayer per year ($3,400 for married filing jointly)
- First eligible year: tax year 2027 (filed in 2028)
- Who qualifies: individual U.S. citizens and residents; no income limits
- Businesses: cannot claim this credit
- Contributions must go to: IRS-qualified Scholarship Granting Organizations in participating states
- State offset: federal credit reduced by any state credit for the same contribution
- No double benefit: cannot also deduct the credited amount as a charitable contribution
- Carryforward: up to 5 years for unused credits
- Nonrefundable: cannot exceed your federal tax liability
The Federal Scholarship Tax Credit is one of the few entirely new federal tax credits to emerge in recent years, and for taxpayers in participating states who regularly make charitable donations to education causes, it could provide meaningful tax savings starting in 2027. Check the IRS OBBBA guidance page regularly as final regulations are still being issued and the list of participating states continues to evolve. See our full OBBBA tax changes guide for a broader overview of what the law changed.