Everything You Need to Know About IRC §25F And Why You Should Be Paying Very Close Attention

This Is a Big Deal. Like, Really Big.

Brand-new federal tax credits that directly benefit individual taxpayers don’t show up every day. So when the One Big Beautiful Bill Act (OBBB) was signed into law on July 4, 2025, and tucked inside was an entirely new Internal Revenue Code section — §25F — creating the first-ever Federal Scholarship Tax Credit (FSTC), your tax-obsessed advisor did what any self-respecting tax geek would do: I grabbed an espresso and dove in.

This isn’t a tweak. This isn’t an expanded deduction or a sunset extension. This is a permanent, dollar-for-dollar federal tax credit, effective January 1, 2027, for contributions to K-12 Scholarship Granting Organizations (SGOs). As of June 22, 2026, 28 states have already raised their hands to participate. Here’s the deal on how it all works.

How the Federal Scholarship Tax Credit Works: The Mechanics The Credit Itself

Starting January 1, 2027, any individual U.S. taxpayer can make a cash donation to an approved Scholarship Granting Organization and receive a nonrefundable federal income tax credit equal to 100% of that donation, up to $1,700 per tax return per year. Dollar-for-dollar. Not a deduction. A credit. If you owe $10,000 in federal taxes and donate $1,700 to a qualifying SGO, your tax bill drops to $8,300. That’s real money, not a rounding error.

The credit is nonrefundable (meaning it can reduce your liability to zero but won’t generate a refund), but here’s the kicker: any unused portion carries forward for up to five tax years on a first-in, first-out basis. The credit is also permanent with no sunset provision, a rarity in today’s legislative environment, where everything seems to expire at midnight like Cinderella’s carriage.

Key Rules and Mechanics

• CASH ONLY: The credit applies only to cash contributions. Appreciated stock, real estate, or other property donations are not eligible for the §25F credit.
• No Double-Dipping: You cannot claim both the §25F credit AND a charitable deduction under §170 for the same contribution. The credit wins. It’s always more valuable than a deduction.
• State Credit Offset: If your state also has a scholarship tax credit program and you claim it for the same contribution, the federal §25F credit is reduced dollar-for-dollar by the state credit amount. Example: $1,700 donation, $500 state credit claimed = $1,200 federal credit.
• $1,700 Cap is Per Return: This includes joint filers. Married couples filing jointly are subject to the same $1,700 ceiling (not $3,400). Plan accordingly.
• 5-Year Carryforward: Unused credits can carry forward up to five years. A meaningful planning tool for clients with volatile income.

What Is a Scholarship Granting Organization (SGO)?

An SGO is the vehicle through which this whole thing runs. Think of it as the intermediary between your donor-clients and the students who benefit. Not just any nonprofit can hang out an SGO shingle, though. Federal law under the OBBB sets strict qualification standards. To qualify, an SGO must:

• Be a 501(c)(3) public charity. Private foundations are explicitly excluded.
• Maintain a separate fund exclusively for qualified contributions (no co-mingling of funds).
• Spend at least 90% of its income from qualified contributions on scholarships. Administrative costs are capped at 10%.
• Award scholarships to no fewer than 10 students across more than one school.
• Verify annual household income of scholarship recipients to confirm eligibility.
• Prioritize returning scholarship recipients and siblings of scholarship recipients in subsequent years.
• Prohibit donors from earmarking contributions for specific students (distribution is entirely at the SGO’s discretion).

SGOs can only operate in states that have opted into the program, and each participating state must submit an annual list of approved SGOs to the IRS/Treasury by January 1 of each calendar year. States that participate must also confirm their SGOs meet all of the federal requirements above.

Who Are the Students? (The Beneficiary Rules)

Let’s be honest, this program is designed with a relatively broad income threshold. Students eligible to receive SGO scholarships must:

• Be eligible to enroll in a public K-12 school (i.e., not already ineligible for public school).
• Reside in a household earning no more than 300% of their county/area’s median gross income (AMI) in the prior calendar year.

That 300% AMI threshold is shockingly generous in many markets. In high-cost metro areas, that ceiling can push well above $300,000 meaning a substantial portion of upper-middle-class families will qualify. The Urban Institute estimates that 2.7 to 3.6 million taxpayers may ultimately claim this credit annually, diverting an estimated $2.7 to $6.1 billion in federal revenue. The Joint Committee on Taxation (JCT) has pegged the 10-year cost at $25.9 billion. This is a large program.

Scholarships can cover a remarkably broad set of qualified expenses, including: tuition and fees, tutoring, special needs services, books and supplies, computers and technology, internet access, uniforms, transportation, extended-day programs, standardized test fees, dual enrollment tuition, and room and board. The full menu of Coverdell Education Savings Account eligible expenses.

The State Opt-In: Why Your Governor Holds the Key 🗝️

Here’s where it gets interesting from a planning perspective. The program is voluntary for states. The governor (or a designated state official) must formally elect participation and submit a list of approved SGOs to Treasury by January 1 of each applicable year. No opt-in, no scholarships for students in that state. However, and this is critical, donors in non-participating states CAN still contribute to SGOs in participating states and claim the federal credit. The student beneficiary must be in a participating state, but the donor doesn’t have to be.

The 28 States That Have Said ‘Si!’ (As of June 22, 2026)

According to the IRS’s official advance election list, the following 28 states have made a formal advance election to participate in the Federal Scholarship Tax Credit program for 2027:

State

State

State

State

Alabama

Alaska

Arkansas

Colorado

Florida

Georgia

Idaho

Indiana

Iowa

Louisiana

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

North Carolina

North Dakota

Ohio

Oklahoma

South Carolina

South Dakota

Tennessee

Texas

Utah

Virginia

West Virginia

Wyoming

Notable: North Carolina became the first state to formally enact state legislation opting in (passing House Bill 87, the Educational Choice for Children Act, via a legislative override in 2025/2026). Colorado’s Governor Polis, a Democrat, called participation a ‘no-brainer.’ Meanwhile, Oregon, Wisconsin, and New Mexico have publicly stated they will not participate, and Minnesota’s Governor Walz has not yet committed.

The Planning Opportunities: This Is Where It Gets Fun For High-Net-Worth Donors

Let’s be direct: $1,700 per return is not going to move the needle for a $20M net worth client as a standalone strategy. BUT layered into a broader charitable giving framework, it’s free money. The effective cost of the donation is zero (or close to it) because the credit offsets it dollar-for-dollar. Stack this with donor-advised fund planning, qualified charitable distributions (for clients over 70½), and other charitable strategies, and we’ve added another meaningful tool to the kit.

State Credit Coordination: The Math Matters

For clients in states with existing scholarship tax credit programs (Pennsylvania’s EITC, for example, or similar programs in Georgia, Florida, Arizona), the coordination rule is crucial. If you claim both a state AND federal credit for the same contribution, the federal credit is reduced by the state credit amount. In some high-state-credit situations, the federal credit may effectively be zeroed out. Run the math before claiming both. The state credit may be more valuable depending on the client’s marginal state rate.

Non-Participating State Residents: Don’t Sleep on This

Here’s a gem that’s flying under the radar: a resident of a non-participating state (say, Oregon or Wisconsin) can still donate to an SGO in Texas or Virginia and claim the full $1,700 federal credit. The scholarship benefits students in the SGO’s home state but the donor credit is available regardless of where the donor lives. For folks in high-tax, non-participating states, this is a meaningful planning point.

What You Need to Do Right Now: The Action Items

• IDENTIFY PARTICIPATING STATES: Confirm whether your state (or your clients’ states of residence and business operation) is on the participation list. The IRS maintains a real-time list at irs.gov.
• WATCH FOR TREASURY REGULATIONS: Final regulations governing SGO qualification, state procedures, and credit mechanics are still being developed. Expect proposed rulemaking by late 2026.
• EVALUATE CLIENT CHARITABLE GIVING PLANS: For clients who give to educational causes, analyze whether redirecting up to $1,700 in cash contributions to an approved SGO generates a better after-tax result than their current approach.
• STATE CREDIT COORDINATION ANALYSIS: For clients in states with existing scholarship tax credit programs, model the federal/state credit interaction before making recommendations.
• CARRYFORWARD PLANNING: For clients with volatile taxable income, consider the 5-year carryforward as a planning lever — contributing in high-income years to generate credits usable against future liability.
• SGO DUE DILIGENCE: Not every 501(c)(3) involved in education will qualify. Confirm that any organization your client contributes to has been certified by their state’s approved SGO list before claiming the credit.

Bottom Line

The Federal Scholarship Tax Credit is the first federal foray into direct support for K-12 educational choice. A landmark in the 40 years I’ve watched Congress tinker with the tax code. For our clients, this is a real opportunity: a genuine dollar-for-dollar credit, permanent in the code, with meaningful carryforward flexibility and a broad eligible-donor universe. It’s not a silver bullet for major tax reduction but it’s a legitimate, IRS-blessed planning tool that we’ll be working into strategies starting today.

The program goes live January 1, 2027. Treasury regulations are coming. State SGO lists will be finalized. The window to plan is open right now and as the Italians say, Chi dorme non piglia pesci. (He who sleeps doesn’t catch fish.) 🐟

Have questions about how the Federal Scholarship Tax Credit fits into your overall tax strategy? Reach out to us at [email protected] we’d love to talk through the planning opportunities for you and your family.

Grazie Mille, Ciao!