At a Glance
Beginning in 2027, individual taxpayers may be able to claim a federal tax credit of up to $1,700 for qualifying cash contributions to approved Scholarship Granting Organizations in participating states. Nonprofits, schools and donors should use the lead time before the credit takes effect to confirm eligibility, strengthen documentation and understand how the federal credit may interact with state tax benefits and charitable giving strategies.
A new federal tax credit is creating a planning opportunity for individuals who want to support K-12 education through scholarship giving. The One Big Beautiful Bill Act (OBBB) added a federal Scholarship Granting Organization credit for certain cash contributions made by individual taxpayers to eligible Scholarship Granting Organizations ( SGOs). Although the credit does not begin until Jan. 1, 2027, the rules are already attracting attention because they connect charitable giving, state participation and federal tax savings in a way that may be meaningful for donors and nonprofit organizations.
For nonprofits that operate in the education space or work closely with families, schools or philanthropic donors, now is the time to understand how the program is expected to work. The credit is not available for 2025 or 2026 tax returns. Instead, eligible contributions may begin generating the federal credit for tax years beginning after Dec. 31, 2026. That lead time gives states, SGOs and donors an important window to prepare before the first qualifying contributions are made.
How the New Credit Works
Beginning in 2027, individual taxpayers may be able to claim a nonrefundable federal tax credit for qualifying cash contributions to approved SGOs. The maximum annual credit is $1,700 per taxpayer. Because the benefit is structured as a credit, it directly reduces a taxpayer’s federal income tax liability, rather than reducing taxable income like a charitable deduction would.
The credit is also non-refundable, which means it can reduce the amount of federal tax owed but cannot create a refund by itself. If an eligible taxpayer has more credit than they can use in a given year, unused credit may be carried forward for up to five years, subject to the applicable rules. Donors should also be aware that the same contribution generally cannot be used for both the federal SGO credit and a federal charitable deduction. In addition, the federal credit may be reduced if the taxpayer receives a state tax credit for the same contribution.
State Participation Is Required
The federal credit is not automatic in every state. A state must elect to participate in the program, then provide the IRS with a list of qualified SGOs located in that state. Only contributions to listed SGOs in participating states are expected to qualify for the credit. For 2027, the IRS has allowed states to make an advance election before finalizing their lists of eligible organizations, but an advance election alone does not mean every SGO in that state qualifies.
This distinction is especially important for donors. Before making a contribution in 2027 or later, individuals should confirm that their state has elected to participate, the SGO appears on the state’s approved list and the contribution otherwise meets the federal requirements. Georgia and Tennessee, among other states, have both made advance elections to participate for 2027, which makes the topic particularly relevant for donors and nonprofits in those markets.
What Qualifies as an SGO?
An SGO is more than a nonprofit that offers scholarships. To qualify under the federal program, an organization generally must be a tax-exempt charitable organization under Section 501(c)(3), must not be a private foundation and must meet several operational requirements. These rules are intended to help ensure that funds are used for qualifying elementary and secondary education scholarships, are properly tracked and are distributed in a manner consistent with the law.
Among other requirements, SGOs must maintain separate accounts for qualified contributions so those dollars are not mixed with other funds. They must provide scholarships to at least 10 students who do not all attend the same school, spend at least 90% of their income on scholarships for eligible students and award scholarships only for qualified elementary or secondary education expenses. SGOs must also follow rules that prevent donor earmarking for a particular student, prioritize certain returning students and siblings of prior recipients and verify household income and family size for scholarship applicants.
Which Students and Expenses Are Covered?
The program is focused on scholarships for eligible elementary and secondary school students. An eligible student must generally come from a household with income not greater than 300% of the area median gross income for the prior year and must be eligible to enroll in a public elementary or secondary school. The scholarship funds must be used for qualified K-12 education expenses, which may include certain tuition, fees and related education costs as described under the applicable tax rules.
For families receiving scholarships, the legislation also provides favorable tax treatment. Scholarships paid by eligible SGOs for qualified elementary and secondary education expenses are generally excluded from the recipient’s gross income for amounts received after Dec. 31, 2026. That treatment helps preserve the value of scholarship awards for families while supporting the broader policy goal of expanding access to educational options.
What Nonprofits Should Be Thinking About Now
Although 2027 may seem far away, nonprofits that may want to participate should begin assessing readiness now. Organizations should consider whether their current structure, exemption status, scholarship criteria, financial tracking processes and governance practices align with the federal requirements. A nonprofit that already provides scholarships may still need to adjust policies or procedures to meet the program’s specific SGO rules.
Documentation will be especially important. SGOs should be prepared to support how qualified contributions are received, segregated, used and reported. They should also have a clear process for verifying student eligibility, reviewing scholarship expenses and preventing contributions from being directed to specific students. Strong internal controls can help organizations demonstrate compliance and give donors greater confidence in the program.
What Donors Should Know
For individual taxpayers, the new credit may become a useful tool for education-focused giving. However, donors should avoid assuming that every scholarship donation will qualify. The contribution must be made in cash, must be made to a qualified SGO in a participating state and must meet the timing and other requirements that apply beginning in 2027. Donors should also evaluate how the federal credit interacts with any state credit, their overall federal tax liability and their broader charitable giving strategy.
Because the credit is capped at $1,700 per taxpayer, planning may be relatively straightforward for some individuals. Still, coordination with a tax advisor will be important, especially for donors who make recurring charitable gifts, contribute through multiple state programs or expect to use carryforward credits. The rules are new and additional guidance may continue to shape how the program is administered.
A Timely Opportunity for Preparation
As the program develops, the organizations and donors that begin planning early will be better positioned to act with confidence when the credit becomes available.
For nonprofits, that may mean reviewing governance, financial tracking and scholarship administration before state lists are finalized. Schools may also have an important role to play by proactively promoting the credit to parents, grandparents and other community supporters. Increased awareness may lead to greater participation and help maximize the potential funds available to benefit students and educational programs. For donors, it may mean waiting for confirmed SGO eligibility, considering how the credit could complement broader giving plans and proactive tax planning to ensure optimal tax saving on your personal tax returns.
Our Windham Brannon team is here to help you understand the rules, evaluate planning opportunities and prepare for the credit’s effective date. If you have questions or need support, please reach out to Carlye Dooley or your Windham Brannon advisor today.
Frequently Asked Questions
- When does the new federal SGO credit begin? The credit applies to eligible contributions made for tax years beginning after Dec. 31, 2026.
- How much is the credit worth? Individual taxpayers may be able to claim a nonrefundable federal tax credit of up to $1,700 per year.
- Will every scholarship donation qualify? No. Contributions generally must be made in cash to an approved SGO in a participating state and must meet the federal requirements.
- What should nonprofits do now? Organizations should review their exemption status, scholarship processes, financial tracking and documentation before the program begins.
