Why States Should Opt-In to the Federal Scholarship Tax Credit: A Gateway to Educational Empowerment

In a landmark move toward expanding educational opportunities, President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025, creating the nation's first federal tax-credit scholarship program (26 U.S.C. §25F). It gives individual donors a federal income tax credit of up to $1,700 a year for qualified contributions to Scholarship Granting Organizations (SGOs); the credit is nonrefundable, is reduced by any State tax credit for the same gifts, and is limited by the donor's tax liability. These organizations, in turn, provide scholarships to K-12 students from households with income up to 300% of their area's median gross income, adjusted for family size. Treasury estimates that about 95% of American children live in households that meet that limit.

The credit applies to gifts made from January 1, 2027, but states hold the key to its success: a State must opt in, one calendar year at a time, before SGOs located there can receive qualified contributions and before students living there can receive these scholarships. As of September 14, 2026, the IRS listed 30 States that had made an advance election for 2027, among them Nebraska, Tennessee, and North Carolina. States not on that list included Oregon, New Mexico, and Wisconsin—even though the credit itself is federal and does not divert State or local tax money. A State can still make its 2027 election on Form 15714 until January 1, 2027.

Bridging the Education Gap: Promoting Equality and Access

At its core, the federal scholarship tax credit addresses a persistent crisis in American education: unequal access. Public schools in under-resourced districts often struggle with overcrowding, outdated materials, and limited extracurriculars, leaving low- and middle-income families with few alternatives. The program empowers these families by channeling private donations into targeted scholarships, with priority, as the law requires, for students who had a scholarship the previous school year and then for students who have a sibling who received a scholarship from the SGO.

Consider the demographics: the limit is 300% of area median gross income, adjusted for family size. In the proposed rules' own example, where the area median is $100,000, a household of four qualifies with income up to $300,000. This broad eligibility ensures the program isn't just for the poorest but for the aspiring middle class, too. Several States already run their own tax-credit scholarship programs, and scholarships under the federal credit can pay for private-school tuition as well as tutoring and special needs services for students in public schools.

Opting in does not let a State pick favored SGOs or narrow the program: under the proposed rules, a State must list every qualifying SGO located in it that seeks to be listed, and may not limit the kinds of schools or qualified expenses scholarships can fund. What a State does control is whether its families can receive these scholarships at all. By opting in, states give their families another tool against the achievement gaps that perpetuate cycles of poverty.

Economic Windfall: Funding Without the Bill

One of the most compelling arguments for opting in is cost: the credit is federal, so it does not divert State or local tax money. Unlike vouchers that redirect state taxes, this credit incentivizes private giving. A participating State does take on work: it must certify its SGOs each year and review their annual audits. Treasury and the IRS estimate that by 2030 more than 11 million taxpayers could give about $26 billion a year in qualified contributions, enough for about 2 million full-time scholarships of $12,000 or 5 million part-time scholarships of $4,500 a year; actual results depend on State participation, donations, and SGO decisions.

For states, the return can be large. Treasury's analysis of the proposed rules expects students who benefit to complete more schooling and earn more over their lifetimes, citing research that each additional year of schooling raises earnings by about 10%. In opting-in states, SGOs stimulate local economies: donors claim credits, scholarships boost school enrollments (and jobs), and families spend on supplies and transport.

Moreover, the program encourages philanthropy. In States that already run their own tax-credit scholarship programs, federal alignment could amplify existing efforts, and donors from any State can claim the federal credit for gifts to SGOs listed by another State. Opting out? Residents can still give to SGOs in other States and claim the credit, but students living in the State cannot receive these scholarships.

Lessons from the Trailblazers: Early Success Stories

By September 14, 2026, 30 States had made advance elections for 2027, according to the IRS, from Alabama to Wyoming.

Evidence from school choice programs is telling. According to the Treasury–Education fact sheet, 10 of the 16 randomized controlled trials that have examined the impact of school choice on academic achievement found positive impacts for some or all participants. Opting in positions states to bring these results home, with added safeguards like SGO audits and transparent reporting.

For undecided legislatures, a delay may prove costly. Treasury and the IRS published temporary and proposed rules on October 2, 2026. For 2027, a State must make its advance election on Form 15714 by January 1, 2027 and submit its SGO list by February 15, 2027; if it misses the list deadline, no organization in that State qualifies as an SGO for that year.

Innovation and Accountability: Safeguards Built In

Critics worry about accountability, but the program embeds protections. SGOs must give scholarships to 10 or more students who do not all attend the same school, spend at least 90% of their income on scholarships, verify each student's eligibility and every expense, undergo an annual independent financial and programmatic audit, and send their annual report and audit to each State that lists them. States can remove an SGO that stops meeting the requirements, after due process, and the federal credit is reduced by any State credit for the same gift, so donors cannot double-dip.

Conclusion: Seize the Moment for Future Generations

The federal scholarship tax credit isn't just policy—it's a promise of possibility. By opting in, states let their families receive scholarships funded by federally credited gifts, without spending State tax dollars on the credit. Treasury and the IRS estimate that by 2030 more than 11 million donors could take part. The question isn't if, but how soon. Leaders in California, New York, and beyond: Follow Nebraska's lead. Your students—and your state's future—depend on it.

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 (participating States as of September 14, 2026); the Treasury–Education fact sheet on the credit (October 1, 2026). Reviewed against these sources on October 18, 2026. The proposed regulations may change before they are made final.