Want to Fund a Scholarship Instead of Paying the IRS?

Key Takeaways

• Starting January 1, 2027, the Federal Scholarship Tax Credit, also called the Education Freedom Tax Credit, lets individuals redirect up to $1,700 ($3,400 for married couples) of their federal tax bill to qualified K-12 scholarship granting organizations (SGOs), dollar for dollar.
• About 30 states had opted in as of mid-September 2026, and more are expected to join before the program launches. Donors in any state can still claim the credit by giving to a listed SGO elsewhere.
• Unlike a charitable deduction, this is a full credit: a qualifying gift reduces your tax bill dollar for dollar rather than reducing your taxable income.
• In many states, you can stack this with an existing state scholarship tax credit, though the order and designation of your gift determines how much of each credit you receive.

Every year you write a check to the U.S. Treasury, and every year Congress decides what to do with it. You don’t get a vote. You don’t get a receipt that says “your $1,700 went to something you’d be proud of.” It just goes.

Starting January 1, 2027, you get a say on a small piece of it. You can send $1,700 to the IRS as usual, or you can send that same $1,700 to a qualifying K-12 scholarship organization in a participating state and get every dollar back as a federal tax credit.

Same money out of your pocket. One version helps a kid better afford school. The other one goes into a very large pile in Washington. Your call.

What Is the Federal Scholarship Tax Credit?

The program is called the Federal Scholarship Tax Credit (Treasury is calling it the Education Freedom Tax Credit, so you’ll see both names). Treasury and the IRS released the rules on October 1, and they expect it to become the largest school-choice program in the country: more than 11 million donors, roughly $26 billion a year, and over 2 million scholarships annually by 2030.

How Much Control Do You Have Over Where Your Gift Goes?

You choose the organization. You do not choose the student. The law flatly prohibits earmarking a gift for a particular child, including your own grandkids.

Beyond that, the choice is yours. Each participating state will publish a list of approved scholarship-granting organizations (SGOs), and you can give to any SGO on any state’s list. Many will be local: a diocese, a community foundation, a school district’s foundation, or a scholarship fund that already runs your state’s existing tax-credit program. Others will be statewide or multistate. Some focus on private school tuition, some on tutoring and special-needs services for public school students, some on both. Each SGO can only award scholarships to students who live in the state that listed it.

So if you care about where the money lands, research the SGOs and pick the one whose mission matches how you want your dollars deployed. The official IRS lists won’t be final until February 15, 2027, but if your state already has a scholarship tax credit, the organizations in that program are likely candidates, and a good place to start looking now.

One open question: the proposed rules don’t say whether you can direct a gift to a specific school or parish within an SGO. Many practitioners expect the answer to be yes, but it isn’t settled. We’ll let you know when it is.

How Does This Compare to a Normal Charitable Deduction?

This is a dollar-for-dollar credit rather than a deduction, so your tax bill drops by the full amount you give rather than a fraction of it.

Many gifts get you a deduction. Under the 2026 rules, that’s worth at most 35 cents on the dollar if you itemize, and only on gifts above half a percent of your income. If you don’t itemize, the new $1,000 ($2,000 joint) charitable deduction is worth maybe 22 to 24 cents on the dollar. Nice, but not often life-changing.

This is a credit rather than a deduction. Give $1,700 to a qualifying SGO, and your federal tax bill drops by the full $1,700, dollar for dollar.

Let’s be honest about who benefits. If you already give to K-12 education, whether that’s your parish school, a tuition assistance fund, your grandkids’ school annual fund, or a tutoring program, this is about as close to a no-cost benefit as the tax code gets. Route the first $1,700 of that giving (or $3,400 as a couple) through a listed SGO and your after-tax cost on that slice drops from at least $1,105 to zero.

If you don’t currently give to schools, this won’t make you richer. You were going to pay the $1,700 either way. But you get to decide it goes to a student instead of wherever the IRS was planning to put it. For a lot of our clients, that alone is worth the time it takes.

How Much Can You Claim?

• $1,700 credit per person per year, dollar for dollar.
• Married filing jointly can claim up to $3,400, but only if each spouse makes a separate $1,700 gift in their own name. Two checks, two acknowledgment letters. The IRS is not going to split one $3,400 check for you.
• Giving more than $1,700 doesn’t bank extra credit for next year. The excess is just a regular charitable deduction.
• The credit is nonrefundable. If your federal tax is under $1,700, the unused portion carries forward up to five years.

What Rules Apply to Your Gift?

• Cash only. Checks, cards, electronic transfers, after-tax payroll deductions. No appreciated stock, no crypto.
• The SGO must be on a participating state’s official IRS list. As of mid-September, 30 states had opted in, including South Carolina, Ohio, North Carolina, Georgia, Florida, Texas, Tennessee and Virginia. Not yet: California, New York, New Jersey, Illinois, Pennsylvania, Arizona, Maryland and D.C.
• You can give to an SGO in any participating state no matter where you live. If your state hasn’t opted in, you still get the credit by giving to a listed SGO somewhere else. The scholarships just go to kids in that state.
• You have to designate the gift as a “qualified contribution” when you make it. It’s a checkbox. Check it.
• Gifts through a partnership or S corporation don’t count. Give personally.
• You can’t also deduct the same dollars as a charitable contribution. The IRS is generous here, but only to a point.

Can You Claim Both a State and Federal Scholarship Tax Credit?

In many cases, yes. Nineteen states already offer their own credits for SGO donations, anywhere from 50% to 100% of the gift with varying caps, and the federal rules let you claim both as long as you set the gift up correctly.

Ohio is a clean example. The state offers a credit of up to $750. Give $2,450 to an SGO that’s both state-certified and on Ohio’s federal list, designate $1,700 as your federal qualified contribution, and you get the full $1,700 federal credit plus the $750 Ohio credit. Give only $1,700 and claim the Ohio credit on it, and your federal credit shrinks to $950.

Two cautions. First, the state credit and the federal list are two different things. An SGO can qualify for one and not the other, so confirm both before you give. Second, every state does this differently. For your state’s rules, the NCSL tax-credit scholarship policy scan and EdChoice’s state-by-state program directory are the two best references. Or just ask us. We have clients in almost every state and can tell you quickly whether stacking works where you live.

Which Students Qualify for a Scholarship?

Any student eligible to attend public school whose household income is under 300% of area median income, which Treasury estimates covers the vast majority of kids in participating states. The funds can pay private school tuition, but also tutoring, special-needs services, books, technology and school-required programs for public school students. The family isn’t taxed on the scholarship.

What Should You Do Before the Credit Takes Effect?

1. If you support a school or scholarship fund today, ask them whether they’re becoming, or partnering with, a listed SGO for 2027. State lists are due to the IRS by February 15, 2027.
2. Start researching SGOs in your state now, so you’re ready to give when the lists go live.
3. Treat this as the first $1,700 of your existing giving, rather than a replacement for it.
4. If you’re married, plan two separate gifts.
5. Talk with us before you give if you also claim a state credit for scholarship donations. The order and designation of the gifts determines whether you get both.
6. Keep your other giving going. SGO credit dollars can’t also be deducted, but your remaining cash gifts still qualify for the itemized deduction or the new $1,000 ($2,000 joint) non-itemizer deduction. The credit, the deduction, appreciated-stock gifts, donor-advised funds and QCDs each do a different job, and a conversation with your advisor can help coordinate which combination accomplishes your giving goals efficiently.

The regulations are proposed and could change before they’re final, though taxpayers may rely on them for 2027 contributions. We’ll keep you posted as guidance evolves.

Frequently Asked Questions About the Federal Scholarship Tax Credit

Is my state participating in the Education Freedom Tax Credit?

As of mid-September 2026, about 30 states had opted in, including Ohio, Florida, Texas, Georgia, Tennessee, South Carolina, North Carolina and Virginia. California, New York, New Jersey, Illinois, Pennsylvania, Arizona, Maryland and D.C. had not. Participation is voluntary and growing, so check the current list before giving, since you can claim the credit by giving to a listed SGO in any participating state regardless of where you live.

Does this credit affect how much I can give through donor-advised funds or QCDs?

No. The $1,700 (or $3,400 joint) credit applies only to a qualified contribution made directly by an individual to a listed SGO, so a grant from a donor-advised fund would not itself qualify for this credit. Your DAF grants, QCDs, and other giving vehicles continue to work exactly as they did before, and a coordinated giving plan often uses several of them together.

What happens if the final regulations differ from the proposed rules?

Treasury has said taxpayers may rely on the proposed regulations for 2027 contributions even before they are finalized. The $1,700 cap, the cash-only requirement, and the 300% area median income threshold are set in the underlying statute rather than left to Treasury’s discretion, so they are unlikely to change in the final rules.

How do I confirm a scholarship-granting organization is on the official list?

Each participating state publishes its own list of approved SGOs, finalized by the IRS no later than February 15, 2027. If your state already runs its own scholarship tax credit program, the organizations certified there are the most likely candidates for the federal list, but confirm an organization’s status before you give, since state certification and federal eligibility are determined separately.

Ready to Build the Scholarship Tax Credit into Your Giving Plan?

For families who already give to K-12 education, this may be one of the more straightforward planning moves available before 2027, but a few details are easy to get wrong: which SGOs are both state-certified and on the federal list, how a married couple splits their gifts to capture the full $3,400, and how to sequence a state credit so it doesn’t shrink your federal one.

At Prosperity Capital Advisors, we work through exactly this kind of coordination as part of The Tax Management Journey®, looking at the scholarship credit alongside your other giving vehicles, donor-advised funds, QCDs, and appreciated-stock gifts, so your full giving strategy works toward the same goal rather than each piece operating on its own.

If you already support a school or scholarship fund, or you’re deciding whether this credit changes how you approach 2027 giving, talk with your advisor before the state lists go live so you can structure your gift to capture both the state and federal credit from the start.

Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“Prosperity”), an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Prosperity does not provide tax or legal advice. For more information, please visit www.adviserinfo.sec.gov.

Sources: U.S. Department of the Treasury press release, Oct. 1, 2026; IRS, Federal Scholarship Tax Credit (FSTC) participating states (irs.gov); National Conference of State Legislatures, Education Choice State Policy Scan: Tax-Credit Scholarships (ncsl.org); EdChoice, Tax-Credit Scholarship Programs (edchoice.org); BakerHostetler, “Tax Credit for Donations to Scholarship-Granting Organizations,” Oct. 5, 2026.