Understanding the New Federal Tax Credit for Scholarship Contributions (Section 25F)

What Is Section 25F?

Section 25F of the Internal Revenue Code, enacted under the One, Big, Beautiful Bill Act (OBBBA), introduces a groundbreaking federal tax credit designed to encourage private funding for K-12 scholarships. This initiative aims to expand educational opportunities for students from low- and middle-income families.

How Does the Tax Credit Work?

Starting January 1, 2027, individual taxpayers can claim a nonrefundable federal tax credit of up to $1,700 for cash contributions to qualifying Scholarship Granting Organizations (SGOs). Key details include:

• The credit reduces federal tax liability but cannot create a refund (nonrefundable).
• Unused credits can be carried forward for up to five taxable years on a first-in, first-out basis.
• SGOs can only give scholarships to students whose families earn less than three times the average income for their area.

State Participation Requirements

This credit is not automatically available nationwide. States must elect to participate and submit annual lists of approved SGOs to the IRS by January 1 each year. The election must be made by the Governor or designated state authority.

Currently, Virginia is the only state to have opted in, but Nebraska’s governor has signed an executive order indicating Nebraska’s intent to opt in. States may begin submitting elections in 2026, and some states will choose to opt out as announced by various governors. The credit can only be claimed for contributions to SGOs on a state’s certified list.

Navigating State Credit Offsets

Section 25F(b)(2) requires that the federal credit be reduced by any state tax credit claimed for the same contribution. For example:

• Contribution: $1,700
• State credit: $500
• Federal credit: $1,200

If the state credit equals or exceeds $1,700, no federal credit will apply.

Understanding the No Double Benefit Rule

Contributions claimed for the Section 25F credit cannot also be deducted as charitable contributions under Section 170. This prevents taxpayers from receiving two benefits for the same donation.

Scholarship Granting Organization (SGO) Requirements

Not all education-focused charities qualify as SGOs. To be eligible, organizations must:

1. Be a 501(c)(3) entity.
2. Serve at least 10 students at different schools.
3. Spend at least 90% of income on scholarships.
4. Provide scholarships only for qualified K-12 education expenses.
5. Maintain one or more separate accounts for qualified contributions.
6. Give priority to students who received a scholarship last year, followed by those with a sibling previously awarded by the organization.
7. Verify household income and family size.
8. Avoid earmarking contributions for specific students.
9. Ensure scholarships are not awarded to disqualified persons.

If an organization later loses its qualified status, donors are generally protected—unless they were aware of or responsible for disqualifying activities.

Some SGOs operate across multiple states. Donors contributing to these multistate organizations must designate which participating state’s list includes the organization and where their contribution will be used.

What This Means for You

While 2027 is a while off, we want to ensure you’re prepared to take full advantage of the new credit when it becomes available in 2027. This opportunity could significantly impact your charitable giving strategy and overall tax planning. While states have not yet opted in, now is the time to start evaluating your goals and understanding how this credit fits into your financial picture. We’ll keep you informed as regulations develop and states make participation decisions. If you have questions or would like to discuss how this may affect your tax strategy, contact our team today—we’re here to help you plan ahead.