A $1,700 Federal Tax Credit for School Scholarship Donations Starts January 1. Thirty States Have Opted In.

A new federal tax credit for donations that fund private school scholarships takes effect at the start of 2027. On October 1 the IRS announced that Treasury had issued proposed regulations spelling out how it will work, and the proposal was published in the Federal Register the following day as REG-117199-25. Comments are due December 1, 2026.

What the credit is worth

Section 25F gives an individual taxpayer a nonrefundable credit for qualified cash contributions to an eligible scholarship granting organization, or SGO. The statutory cap is $1,700 per taxpayer. The proposed regulations read that as applying to each spouse on a joint return, which produces the $3,400 figure the IRS cites for married couples filing jointly.

Being nonrefundable matters: the credit cannot exceed the taxpayer's liability under section 26(a). Unused amounts may be carried forward, but not past the fifth taxable year after the year the credit arose, and carryforwards are used first-in, first-out and before current-year credits. The credit is also reduced by any state credit claimed for the same contribution, which is the proposal's answer to the existing state-level scholarship credit programmes.

Only in states that opt in

Nothing happens in a state until that state elects to participate. Under the proposal the election is made by the Governor, or by another individual, agency or entity designated under state law, and the electing state must give the IRS a list of qualifying SGOs located in the state — generally by January 1 each year, and as early as practicable for 2027. The list has to carry a certification that whoever submitted it has authority to act for the state. Revenue Procedure 2026-6 sets the exclusive procedure for making the 2026 election.

A taxpayer is not confined to their own state. The IRS says contributions may be made to an SGO in any participating state.

Thirty states have already opted in, and we encourage all 50 states to participate.

Who the scholarships are for

An eligible student is one who is eligible to enrol in a public elementary or secondary school and whose household income is not greater than 300% of area median gross income for the calendar year before the scholarship application. The proposed rules exclude non-cash items, such as imputed returns on assets, from that income calculation. A student does not have to be enrolled anywhere at the time of application.

What an SGO has to do

• Be a section 501(c)(3) public charity.
• Keep qualified contributions in a separate account.
• Spend at least 90% of its income on scholarships for eligible students. The proposal defines income as total gross receipts from all sources, not only qualified contributions; a single-state SGO using the operational safe harbor counts only qualified contributions and related earnings.
• Meet the 90% test by the end of the year after the income is received, with amounts counted as spent when paid.
• Serve 10 or more students who do not all attend the same school.
• Give priority to returning students and to their siblings.
• Verify income and family size, avoid awards to disqualified persons, and limit scholarships to qualified elementary or secondary education expenses.

The 90% definition is the provision most likely to draw comment. Measuring the test against total gross receipts rather than against the qualified contributions that generated the credit sets a tighter constraint for an organization with other revenue.

The timetable

Section 25F applies to taxable years ending after December 31, 2026, and the IRS says taxpayers, states and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027. Written comments close December 1, 2026. A public hearing is scheduled for Tuesday, December 15 at 10 a.m. Eastern; requests to attend are due by 5 p.m. Eastern on December 10, and the hearing will be cancelled if no speaker outlines are received by December 1.

This article describes a proposed regulation. It is not tax advice; the rules are not final and individual eligibility depends on facts the proposal leaves to be determined.