Starting January 1, 2027, a new federal credit can pay you back for a cash gift to an approved scholarship group, up to $1,700 a year. It lets you direct up to $1,700 of your federal tax to K-12 scholarships at little or no net cost. The IRS published its first detailed rules on October 2, 2026, and a few of them can quietly cost you the credit.
What Is the Federal Scholarship Tax Credit?
It is a nonrefundable federal income tax credit for cash gifts to a scholarship granting organization, or SGO. An SGO is a public charity that a participating state has approved to fund K-12 scholarships. Congress created the credit in the One Big Beautiful Bill Act, and it sits in Section 25F of the tax code. The law has no end date.
A credit is worth far more than a deduction of the same size. A deduction only lowers the income you pay tax on. A credit lowers the tax itself.
The $408 assumes your other gifts already clear the new 0.5 percent of income floor on itemized charity deductions. The $0 assumes you have at least $1,700 of income tax.
The credit is also separate from the charitable deduction for non-itemizers. That deduction started in 2026 and covers gifts to public charities generally.
Who Can Claim the Credit?
Any individual who is a US citizen or US resident can claim it. The donor has no income limit and no phase-out. High earners get the same $1,700 as everyone else. You also need income tax to use it against, because the credit is nonrefundable.
Nonresident aliens do not qualify. Someone who becomes a resident partway through the year counts only the gifts made while a citizen or resident.
Business owners should watch one rule closely. Under the proposed regulations, a gift made by your partnership or S corporation does not count, even though your share of it may pass through to your return. To claim the credit, you must give as an individual.
How Much Can a Married Couple Claim?
A married couple filing jointly can claim up to $3,400, as long as each spouse makes a qualifying gift of at least $1,700. Treasury reads the $1,700 cap as applying per person, and the IRS repeats that reading on its program page. The rule is still in proposed form.
The IRS example has both spouses give and both designate their own gifts. If one spouse gives the whole $3,400, you should expect a $1,700 credit.
How the credit is calculated
CalculationUnder the proposed regulations, credit = the smaller of $1,700 or (your designated gifts minus any state credit on them)
- Single donor, no state credit: A gives $2,000 and designates all of it. The credit is $1,700. The other $300 may be deductible as a charitable gift.
- Married couple, no state credit: Each spouse gives $2,000 and designates all of it. The credit is $3,400 on the joint return. The other $600 may be deductible.
- Donor with a state credit: D designates $2,000 in gifts and claims a $400 state credit on them. D's $2,000 drops to $1,600, so the federal credit is $1,600.
When Do Gifts Start to Count?
Only gifts made on or after January 1, 2027 can count. The credit applies to taxable years ending after December 31, 2026, so a gift you make this December earns no credit. If this credit is the reason you are giving, wait until 2027 and until the group appears on the IRS SGO list.
A December 2026 gift earns no credit
CautionA gift to a scholarship charity in 2026 can still be an ordinary charitable gift, but it cannot produce a Section 25F credit. You also cannot move it into 2027 later. Your credit is based on the year you made the gift.
Which States Are Participating for 2027?
As of October 22, 2026, the IRS listed 30 participating states: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming. The IRS count was 27 in June.
Living in a state that has not opted in may not stop you. The proposed regulations let you give to an SGO on any participating state's list, wherever you live. A donor in California or New York, neither of which was on the October list, could give to an approved SGO in a participating state and still claim the credit. The money must fund scholarships in the state where that SGO is listed.
States must send the IRS their SGO lists by January 1 each year, and each election lasts one year. For 2027 only, the temporary regulations give states until February 15, 2027 to send their lists, so some groups may not appear in January.
How Do You Claim the Credit?
You claim it on Form 8525 with your federal return, and the form asks for a donor number from each SGO you gave to.
- Check the IRS SGO list before you give. You can generally rely on a group's listing on the date of your gift. That protection goes away if you knew the group did not qualify, or if you helped cause or knew about the problem that got it removed from the list.
- Designate the gift when you make it. Tell the SGO that the gift is a qualified contribution for Section 25F. You cannot add this later, and once made, the designation cannot be undone.
- Give cash. Check, money order, credit or debit card, electronic transfer, and after-tax payroll deduction all count under the proposed regulations. Stock and digital assets do not.
- Keep the acknowledgment. The SGO must send one by January 31 of the next year with its EIN, your total designated gifts, your donor number, and the value of anything you received in return.
- File Form 8525. A 2027 gift goes on the 2027 return you file in 2028. If the donor number is missing, the IRS presumes you made no qualified gift to that SGO, and you would have to prove otherwise.
Anything of value the SGO gives you in return, such as dinner tickets at a fundraiser, is subtracted from your qualified contribution.
Where people can lose the credit
Caution- No designation: an undesignated gift is an ordinary charitable gift and earns no credit.
- Earmarking: an SGO cannot set aside a gift for a particular student, so you cannot direct your gift to your own child or a friend's child.
- Large gifts by parents (a limit on scholarships): a person who gives more than $5,000 in a year, if that is also more than 2 percent of what the group received, is a substantial contributor under the proposed rules. Spouses are counted together. This rule limits scholarships: the SGO generally cannot award a scholarship to your family, including siblings, nieces and nephews, that year or the next.
How Do State Tax Credits Change the Math?
Under the proposed regulations, a state credit comes off your designated gifts before the $1,700 cap applies, so it cuts your federal credit only if what is left falls below $1,700. Treasury's stated goal is to stop your combined federal and state credits from exceeding what you gave.
Treasury's own numbers show how this works. A donor who gives and designates $2,500 and claims a $500 state credit has $2,000 left, so the full $1,700 federal credit survives. The donor in our third calculation above gave $2,000 and claimed $400, which left only $1,600. If your state offers a credit and you want the full $1,700 federal credit, designate at least $1,700 and make your total gift at least $1,700 plus the state credit.
Partly designated gifts follow a similar logic. The state credit is treated as coming first from the part you did not designate. In the IRS example, a donor gives $4,000, designates $1,700, and claims a $400 state credit, and the donor keeps the full $1,700 federal credit.
A state credit you carry to another year still counts against the year of the gift. A state deduction generally does not affect the federal credit.
What Happens if the Credit Is More Than Your Tax?
Any unused credit carries forward for up to five years, and the oldest amounts are used first. The credit is limited by your income tax liability, including alternative minimum tax, after certain other personal credits such as the child tax credit.
Retirees and others with little tax in a given year should size the gift to the tax they expect, because a carryforward can expire unused. In the IRS carryforward example, a 2027 amount still unused after five years is lost in 2033.
There is one more trap here. Credit you carry forward still counts as allowed, so you cannot deduct that part of the gift as a charitable contribution. Only the portion that earns no credit, such as the $300 in the first calculation above, may be deductible.
What Does This Mean for Families Seeking Scholarships?
A student qualifies if the household income is no more than 300 percent of area median gross income and the student is eligible to enroll in a public elementary or secondary school. Under the proposed income definition, which counts only cash income, Treasury estimates that about 95 percent of US children live in households under that limit. The student must also live in the state where the SGO is listed, with exceptions for military and tribal families, so a family in a state that did not opt in generally cannot receive these scholarships.
Scholarship money is tax-free to the family under Section 139K when it pays for qualified K-12 expenses. Those expenses come from the Coverdell education savings rules and include tuition, tutoring, books, and supplies at a public, private, or religious school. Treasury has said more guidance on qualified expenses and schools is on the way. Families apply to the SGO directly, and the SGO must verify income and family size.
Could These Rules Still Change?
Yes, parts of them could. The statute is final, and the temporary regulations (T.D. 10057) govern how states and SGOs take part. The donor rules in this article, including the $3,400 joint amount and the out-of-state giving rule, come mainly from proposed regulations (REG-117199-25). Comments are due December 1, 2026, and a hearing is set for December 15, 2026.
You may rely on the proposed regulations for gifts made on or after January 1, 2027, until final rules apply, as long as you follow the donor rules in them fully and consistently.
If you plan to give in 2027, check for final rules and the current IRS lists before you send money. If you want help fitting this credit into your 2027 tax picture, our tax planning team can run the numbers with you.
Thinking about a scholarship gift in 2027? Contact TS CPA for a free consultation. We respond within the same day.