Federal Scholarship Tax Credit for Contributions to Scholarship Granting Organizations

Last Updated: October 5, 2026

The Issue

The One, Big, Beautiful Bill Act (OBBBA - P.L.119-21) included a provision (Section 70411) to create the Federal Scholarship Tax Credit (FSTC, also known as the Education Freedom Tax Credit), a new nonrefundable tax credit for contributions to Scholarship Granting Organizations (SGOs). An SGO is defined as a 501(c)(3) public charity that provides scholarships to students for eligible elementary and secondary expenses. For contributions after January 1, 2027, individual taxpayers can receive a tax credit of up to $1,700 per year for qualified cash contributions to an eligible SGO. States must first elect to participate in the program and provide the Secretary of the Treasury with a list of SGOs that meet the requirements. Read the Department of Education's fact sheet on this tax credit.

Scholarship Granting Organizations

SGOs must be section 501(c)(3) public charities operating in one of the 50 states or District of Columbia, provide 10 or more scholarships to elementary and secondary school students, spend at least 90% of their income on scholarships for eligible students, be included in a list of qualifying SGOs shared with the Internal Revenue Service (IRS), and more. SGOs must have a system to verify the household income and family size of elementary and secondary school students eligible for scholarships, which is limited to students from a household with an income of up to 300% of the area median gross income. In the District of Columbia, 300% of the area median gross income (in 2024 dollars) is $329,610.

The scholarships can cover expenses including tuition, fees, tutoring, room and board, support for students with disabilities, transportation, and computer technology or equipment for students in public, private, or religious schools. The provision in OBBBA does not allow SGOs to award scholarships to donors and disqualified persons with respect to a private foundation.

Accessing the Federal Scholarship Tax Credit

The FSTC is nonrefundable, and because it is a tax credit, would reduce a contributor's federal income tax, rather than their taxable income. For eligible taxpayers to access the FSTC, states and the District of Columbia (which the IRS listed as the only eligible entities in the guidance released in December 2025) must first choose to participate and then provide the IRS with a list of SGOs that meet the requirements by January 1, 2027. States can pass legislation to opt in or submit an Advance Election form to the IRS to also have more time to identify the SGOs to include in their eligibility list. As of July 24, 2026, 30 states have opted in to the FSTC.

Impact on Philanthropy

The direct impact on philanthropy and the philanthropic ecosystem is unclear. The law identifies a set of criteria that an organization must meet to qualify as a SGO, including:

"such organization provides scholarships to 10 or more students who do not all attend the same school,"
"such organization spends not less than 90 percent of the income of the organization on scholarships for eligible students," and
"such organization does not provide scholarships for any expenses other than qualified elementary or secondary education expenses"

Given the criteria, it appears that community foundations and other grantmaking organizations would not directly qualify as an SGO, and thus individuals would not be able to access the tax credit for cash contributions to those organizations. Tax filers could still make a charitable contribution and benefit from a nonitemizer deduction or be closer to exceeding the 0.5% floor of adjusted gross income if they itemize. It is also unclear whether a supporting organization or separate LLC affiliated with a community foundation or other charitable organization would be considered an eligible SGO. Pending questions may be answered in future guidance and regulations from Treasury and the IRS after they review the comments submitted.

Recent Actions

Legislation

Federal Tax Credit Scholarship Improvement Act (S.4322): This bill, introduced by Sen. Cindy Hyde-Smith (R-MS), would index the FSTC to inflation starting in tax year 2027 and require the U.S. Department of the Treasury to publish adjustments annually. It would also allow joint filers to claim up to twice the individual tax credit amount.
S.5421/H.R.10412: This would repeal the FSTC’s state opt-in requirement. Reps. Adrian Smith (R-NE), Tim Walberg (R-MI), and Burgess Owens (R-UT) introduced the bill in the House; Sen. Bill Cassidy (R-LA) introduced it in the Senate.
S.5420/H.R.10413: This would allow joint filers to claim up to twice the credit amount. Reps. Adrian Smith (R-NE), Tim Walberg (R-MI), and Burgess Owens (R-UT) introduced the bill in the House; Sen. Bill Cassidy (R-LA) introduced it in the Senate.

Regulations

On November 25, 2025, the IRS released a request for comments on future guidance with more information about the FSTC that included eligible SGOs. The request sought insights into the certification process; SGOs that award scholarships in more than one state; whether the IRS should use the definition of "disqualified persons" it applies to private foundations; and other policies, procedures, and requirements.

On October 2, 2026, Treasury and the IRS released temporary regulations and a notice of proposed rulemaking (NPRM).

The temporary regulations, effective December 1, would implement new requirements and procedures for states that elect to participate in the program, and changes to how states maintain a list of eligible SGOs.
The NPRM updates the definition of SGOs and proposed other changes to the FSTC. Comments are due November 30; Treasury and the IRS will hold a public hearing on the NPRM on December 15.
- SGOs must be a Section 501(c)(3) public charity and have a separate account for qualified contributions under Section 25F.
- The proposed regulations include a safe harbor for SGOs that operate in a single state and spend at least 85% of their activities on “scholarship granting activities” for elementary and secondary school students. The activities could be part of the FSTC requirements, in accordance with a state tax credit scholarship program, or other scholarship granting activities.
- The FTSC is limited to individual contributions; pass-through contributions from a public charity would not be eligible. Individuals may contribute to an eligible SGO outside their state of residency. Joint filers could claim up to twice the individual tax credit amount if they each make qualified contributions to eligible SGOs.