The New Federal Scholarship Tax Credit: What Taxpayers Need to Know for 2027
Beginning in 2027, individuals may be eligible for a new Federal Scholarship Tax Credit (FSTC). This nonrefundable federal tax credit allows taxpayers to receive a credit of up to $1,700 per tax return for qualifying cash contributions made to approved Scholarship Granting Organizations (SGOs).
Unlike a charitable deduction, which reduces taxable income, a tax credit reduces federal income tax liability dollar for dollar. For eligible taxpayers, this can provide a significant tax benefit while supporting educational opportunities for students.
How Does the Credit Work?
To qualify for the credit, a taxpayer must make a cash contribution to an approved Scholarship Granting Organization (SGO) on or before December 31, 2027. Contributions of property, including stock, do not qualify.
An SGO is generally a nonprofit organization, often a Section 501(c)(3) organization, that receives charitable contributions and awards scholarships to eligible K-12 students for qualified educational expenses. To qualify for the federal credit, the SGO must be approved and certified under the program requirements established by participating states and the IRS.
These organizations serve as the connection between donors who want to support educational choice and families seeking assistance with educational expenses.
Do I Need to Have School-Age Children to Claim the Credit?
No; the credit is available to eligible taxpayers regardless of whether they have children. Individuals may contribute to a qualified SGO and claim the credit, subject to the applicable limitations.
However, taxpayers should be aware of two important restrictions:
- A contribution used to claim the Federal Scholarship Tax Credit cannot also be claimed as a charitable deduction for federal income tax purposes.
- Contributions cannot be earmarked for a specific student or family. Scholarship awards must be made independently by the SGO according to its established criteria.
Who Can Receive Scholarships?
Families may apply to participating SGOs for scholarships that can be used for a variety of educational expenses, including:
- Tuition and fees
- Academic tutoring
- Special-needs services
- School uniforms
- Books, supplies, and educational equipment
Scholarships may be used for qualifying expenses associated with both public and private education. Eligibility is generally limited to families with household income not exceeding 300% of the area median family income.
Does My State Have to Participate for Me to Contribute?
Taxpayers do not necessarily have to reside in a participating state. As long as a contribution is made to a qualified SGO operating in a participating state and all other requirements are met, the credit may be available. As of July 2026, approximately 30 states have already taken steps to participate in the program.
What About Pennsylvania’s Educational Improvement Tax Credit (EITC)?
Many Pennsylvania taxpayers have asked whether a single contribution can generate both the Pennsylvania Educational Improvement Tax Credit (EITC) and the new federal credit.
Unfortunately, the same contribution cannot be used to claim both tax benefits. Taxpayers who wish to participate in both programs should consider making separate contributions: one contribution that qualifies for the Pennsylvania EITC and another contribution to a qualified SGO for purposes of the Federal Scholarship Tax Credit.
Looking Ahead
The Federal Scholarship Tax Credit creates a new opportunity for taxpayers to support educational scholarships while potentially reducing their federal tax liability. With contributions first becoming eligible in 2027, additional guidance from the Treasury Department and the IRS is anticipated regarding reporting requirements, qualified organizations, and claiming procedures.
For more information, or if you have thoughts and/or questions about the information outlined above, please do not hesitate to contact us; our seasoned and experienced tax professionals are always here to help. You can also learn more by visiting our Tax service page.
