A New Federal Tax Credit Could Help Fund K-12 Scholarships Starting in 2027

Starting in 2027, you may be able to claim a new federal tax credit for certain contributions that fund K-12 scholarships.

The Federal Scholarship Tax Credit, also called the Education Freedom Tax Credit, applies to qualifying cash contributions made to Scholarship Granting Organizations, or SGOs. The IRS recently issued proposed regulations explaining how the program is expected to work.

If you already support education-focused charities or use state scholarship tax credit programs, some of this may sound familiar. The key difference is that this new program creates a federal income tax credit specifically for qualifying SGO contributions.

How the credit works

Beginning in 2027, eligible taxpayers can make cash contributions to qualifying SGOs. An SGO is generally a qualifying charitable organization that uses contributions to provide scholarships for elementary and secondary education expenses.

The federal credit can be worth up to $1,700 per taxpayer each year. A married couple filing jointly may claim up to $3,400, but only if each spouse makes qualified contributions of up to $1,700. That is the Treasury’s proposed reading of the law, and it could change.

This is a nonrefundable credit. It can reduce your federal income tax, but it generally will not create a refund beyond the tax you owe. Unused credit may generally be carried forward for up to five years.

For example, assume you qualify for a $1,700 credit and otherwise owe $8,000 in federal income tax. The credit could reduce that liability to $6,300.

Who qualifies

The credit is for individuals who are U.S. citizens or residents. Only gifts made while you hold that status count.

The gift must come from you directly. Under the proposed rules, a gift made by a partnership or S corporation does not count toward an owner’s credit, even though the owner may still deduct it. If you own a business, give personally if you want the credit.

The gift must be cash. That includes checks, card payments, electronic transfers, and after-tax payroll deductions. It does not include digital assets or appreciated stock.

You must also tell the SGO, at the time of the gift, that you intend it as a qualified contribution. You cannot undo that choice later. If you receive goods or services in return, that value reduces the qualified amount.

Scholarship donation tax benefits existed before this

Giving to scholarship organizations has long carried tax benefits. A contribution to a qualifying charitable SGO could generally be deductible, subject to the normal rules. Several states also offer their own credits.

What changes in 2027 is the type of benefit. A deduction reduces taxable income. A credit reduces your tax directly. A $1,000 deduction does not cut your tax bill by $1,000. Its value depends on your tax rate and whether you itemize. A $1,000 credit generally cuts your federal tax by $1,000 if you owe enough tax to use it.

You cannot claim both on the same dollars. A gift used to claim the credit cannot also be a federal charitable deduction. But the part of a gift that does not go toward the credit may still be deductible. For example, if you give $5,000, you could claim a $1,700 credit and potentially deduct the remaining $3,300.

The scholarships can cover more than private school tuition

The organizations receiving these contributions use the money to fund scholarships for eligible K-12 students. A student’s household income generally cannot exceed 300% of the area median gross income. The student must live in the state where the SGO is listed, with limited exceptions for military and Indian lands families.

Qualified expenses can potentially include private school tuition, tutoring, special-needs services, books, supplies, computers, and other expenses connected with elementary or secondary education. The Treasury says it will issue separate guidance on qualified expenses, so this list could change.

Your state matters, but it may not limit where you contribute

States must elect to participate in the program and identify qualifying SGOs. When the proposed regulations were published, 30 states had submitted advance elections. You may be able to give to a qualifying SGO in a participating state even if you do not live there. That gives you more flexibility in choosing which programs to support.

Before you give, confirm the organization appears on the IRS SGO list, which the IRS builds from state lists.

What you need to keep

The SGO must send you a written acknowledgment by January 31st of the following year. It includes a unique donor number. You report that number on Form 8525 when you claim the credit. If you leave it off, the IRS may presume you did not make a qualified contribution.

Start planning before you give

The credit does not begin until 2027, and the Treasury and IRS are still working through the rules. Taxpayers who support K-12 education should have it on their radar now.

Before making a contribution, talk with your tax advisor about how the federal credit, any state incentives, and your broader giving strategy fit together. For personalized guidance, please contact our office.

These are proposed rules, and they may change. The credit itself is law. But many of the details in this article come from proposed regulations released on October 1, 2026. Proposed regulations are not final. Final rules, additional IRS guidance, state decisions, or new legislation could change how the credit works. Do not make a contribution based on this article alone. Talk with your tax advisor first.

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