Overview: Federal K-12 Scholarship Tax Credit Program

Introduction

The federal scholarship tax credit (Internal Revenue Code section 25F) gives individual donors a federal income tax credit of up to $1,700 a year for qualified cash contributions to scholarship granting organizations (SGOs). SGOs use those gifts for scholarships that help eligible K-12 students pay qualified education expenses at a public, private, or religious school. The credit applies to qualified contributions made on or after January 1, 2027.

Process Flow Steps

1. Donor Eligibility Check
   • An individual who is a U.S. citizen or resident can claim the federal K-12 scholarship tax credit for qualified contributions. The rules set no donor income limit.
     • The credit reduces the federal income tax you owe for the year.
     • The credit is nonrefundable: it can reduce your federal income tax to zero, but any part above that year's tax liability is not paid out as a refund. Unused credit can be carried forward for up to five years.
     • How the credit affects your own return depends on your whole tax situation, including any State tax credit you claim for the same gift. Please consult a tax professional.
2. Donation to a Qualified Scholarship Granting Organization
   • Donors give cash (including by check, card, or electronic transfer) to an SGO and, at the time of the gift, designate it as a qualified contribution for the section 25F credit. A designation cannot be changed afterwards.
     • A gift can be any amount; the $1,700 limit applies to the credit, not to the gift. An SGO qualifies only if a participating ("covered") State includes it on its State SGO list for that year. The IRS publishes the combined IRS SGO list, and donors may rely on an SGO's presence on that list at the time of the gift, so check the list before giving.
   • By January 31 of the following year, the SGO sends each donor a written acknowledgment showing the SGO's EIN, the total the donor designated as qualified contributions that year, and the donor's unique donor number.
   • The donor claims the credit on Form 8525 with their federal income tax return, reporting the donor number from each SGO's acknowledgment. The credit equals the donor's qualified contributions for the year, reduced by any State tax credit for them, up to $1,700, and it is limited by the donor's federal income tax liability.
3. Allocation of Funds by SGO
   • The SGO deposits qualified contributions in a separate account that holds only qualified contributions and their earnings, and reviews scholarship applications from K-12 students.
   • The SGO awards scholarships to eligible students under criteria it sets ahead of time, within the federal rules: the student's household income for the calendar year before the application must be no more than 300% of area median gross income, adjusted for family size; the student must be eligible to enroll in a public school and must generally live in a State whose SGO list includes the SGO; and students who had a scholarship for the previous school year, and then students who have a sibling who received a scholarship from the SGO, get priority.
   • The guidelines that a particular SGO uses to select scholarship recipients and determine scholarship amounts will be available by contacting the SGO.
   • The SGO pays tuition and other school charges directly to the school, pays verified vendors directly, uses a qualified digital wallet, or reimburses a family against a receipt; it does not otherwise pay scholarship money to families.
4. Scholarships pay qualified elementary and secondary education expenses, such as tuition, fees, books, supplies, academic tutoring, and computer equipment. Some items, such as transportation and uniforms, qualify only when the school requires or provides them.
5. Federal rules for SGOs now exist: temporary regulations (TD 10057) bind from December 1, 2026, and proposed regulations (REG-117199-25) may be relied on for contributions made from January 1, 2027, by taxpayers, SGOs, and States that follow the parts that apply to them in their entirety and in a consistent manner. Some pieces are still to come, including Form 8525 and the IRS's donor-number format.

Summary: Money Flow Steps

Step (Entity Involved): Financial Action

1. Eligibility Check (Donor): Confirms the SGO is on the IRS SGO list
2. Donation (Donor & SGO): Gives cash and designates it as a qualified contribution
3. Acknowledgment (SGO): Sends the written acknowledgment by January 31
4. Tax Credit Claim (Donor): Claims the credit, up to $1,700, on Form 8525
5. Fund Allocation (SGO): Reviews applications and awards scholarships
6. Scholarship Payment (SGO): Pays the school or a verified vendor, or reimburses the family against a receipt
7. Application of Funds (Student's Family): Uses the scholarship for qualified expenses
8. Reporting (SGO): Reports qualified contributions to the IRS by February 28, files its annual certification, and has an annual independent audit

Conclusion

The federal scholarship tax credit moves money from donors, through SGOs listed by participating States, to scholarships that pay eligible students' qualified education expenses, with acknowledgment, reporting, verification, and audit duties along the way.

Sources

26 U.S.C. §25F; temporary regulations, TD 10057, 91 FR 62655; proposed regulations, REG-117199-25, 91 FR 62818; the IRS Federal Scholarship Tax Credit page. Reviewed against these sources on October 18, 2026. The proposed regulations may change before they are made final. This is general information, not tax advice.