Feds Provide Guidance on New Federal K-12 Scholarship Tax Credit Program

The U.S. Department of the Treasury released new guidance Thursday for participating states, scholarship-granting organizations and taxpayers as the federal scholarship tax credit program prepares to take effect in January.

Created through President Donald Trump’s massive tax and spending law in 2025, the Education Freedom Tax Credit program allows individuals to claim a dollar-for-dollar federal tax credit of up to $1,700 for donations to certain scholarship-granting organizations (known as SGOs), and taxpayers can contribute to an eligible organization regardless of where that taxpayer lives.

The $1,700 limit applies to the donor credit, not the scholarship amount, and married couples filing jointly can claim a combined $3,400 credit.

These contributions are meant to fund K-12 scholarships, primarily at private schools, though the scholarships can cover tutoring, books, supplies, extended-day programs, and disability services for students who remain in public schools, and tutoring can take place during or after school.

So far, 30 states have agreed to join the program, according to the Internal Revenue Service. Officials also confirmed a deadline for states to opt in by Jan. 1 and to submit their SGO lists by Feb. 15. On a press call with reporters Wednesday, a Treasury official said that if an organization meets the federal statutory requirements, the state must include it on the list submitted to the IRS; states cannot pick and choose the SGOs they like.

States opting in so far include: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

New York Democratic Gov. Kathy Hochul has said that she plans to have her state participate, but wants to first review the federal rules before making a final decision.

Several Democratic governors, including those in Hawaii, Minnesota, New Mexico and Oregon, have said their states won’t participate.

In some states, Republican lawmakers and Democratic governors have had some disputes over the decision to opt in. Democratic governors in North Carolina and Kansas vetoed legislation requiring their states to opt in, but GOP-controlled legislatures overrode both vetoes.

The Democratic governors of Arizona and Wisconsin successfully vetoed GOP legislation that would have opted their states into the program.

Under the program, scholarships may be given to students whose household income is up to 300% of an area’s median income. During the press call, Treasury officials said approximately 95% of American children live in households meeting that threshold, while Department of Education officials said about 28 million children in the 30 participating states would be eligible.

States have limited authority on the rules they can impose on scholarship-granting organizations within their borders; federal rules don’t allow them to supersede limits by the federal government.

Under the federal rules, the organizations would be required to undergo annual financial and program audits and provide those reports to participating states.  States could use the audits to identify problem organizations and remove groups that fail to meet federal requirements or to prevent fraud, including duplicate scholarship payments for the same student expense.

SGOs are required to be 501(c)(3) nonprofits that are not private foundations, and they must keep qualified contributions in separate accounts.

Under the law, SGOs must spend no less than 90% of their income on scholarships. Additionally, each scholarship-granting organization must serve at least 10 students who do not all attend the same school. They cannot earmark donations for a particular student and must verify household income and family size.

Federal statute also requires SGOs to prioritize students who received a scholarship the previous school year, then siblings of the recipients. Students who would otherwise be public school students could qualify for these scholarships.

The rules stipulate that homeschools will be treated as they are defined and categorized according to each state’s law.

According to new estimates provided by the Treasury, by 2030, there could be somewhere between 600 and 700 SGOs with contributions from more than 11 million taxpayers, nearly $26 billion in qualified contributions annually and as many as 2.2 million scholarships annually.

Stateline reporter Robbie Sequeira can be reached at rsequeira@stateline.org.

This story was originally produced by Stateline, which is part of States Newsroom, a nonprofit news network which includes Virginia Mercury, and is supported by grants and a coalition of donors as a 501c(3) public charity.

By Robbie Sequeira, Virginia Mercury

Virginia Mercury is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Virginia Mercury maintains editorial independence. Contact Editor Samantha Willis with questions: info@virginiamercury.com.