Federal Scholarship Tax Credit for Contributions to Scholarship Granting Organizations
The Issue
The One, Big, Beautiful Bill Act (OBBBA - P.L. 119-21) included a provision (Section 70411) to create 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.
Summary of the Guidance
On November 25, 2025, the Internal Revenue Service (IRS) released a request for comments on future guidance with more information about the Federal Scholarship Tax Credit (FSTC, also known as the "Education Freedom Tax Credit") that included eligible SGOs and other details. The request for comments 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.
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 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 April 15, 2026, 27 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.
