New Federal Tax Credit for Private School Scholarships

The new tax legislation provides a federal tax credit that may impact your private school and donors. This provision introduces a federal income tax credit for individuals who make cash contributions to qualified scholarship granting organizations (SGOs). The new credit is effective for tax years ending after December 31, 2026.

About the Credit

Individuals may claim a federal tax credit of up to $1,700 per year for cash contributions made to SGOs that fund scholarships for eligible students to attend private K-12 schools.

Eligible students are:

• Those from households with income not exceeding 300% of the area median gross income
• Eligible to enroll in public elementary or secondary schools.

Scholarships must be used for qualified elementary or secondary education expenses.

If a donor receives a state tax credit for the same contribution through a state program, the federal credit is reduced by the state credit amount. In addition, donors cannot claim both the federal credit and a charitable deduction for the same contribution. The credit will only be available in states that elect to participate.

Requirements for Scholarship Granting Organizations

To be eligible as a SGO and to accept contributions, the requirements include:

• Be a 501(c)(3) public charity
• Maintain separate accounts for these contributions
• Provide scholarships to at least 10 students attending different schools
• Spend at least 90% of your income on scholarships for eligible students
• Not provide scholarships for any expenses other than qualified elementary or secondary education expenses
• Be certified by the state as an eligible SGO in the lists provided to the IRS

Scholarships cannot be earmarked for specific individuals, and SGOs must verify student eligibility annually. Priority must be given to students who received scholarships the previous year and to siblings of current recipients. SGOs are prohibited from awarding scholarships to “disqualified persons” (e.g., substantial contributors, certain insiders).

Next Steps

As this program rolls out, determine if your state will participate. If your school operates or is affiliated with an SGO, ensuring compliance is important to maintain eligibility.

If you are not currently affiliated with an SGO, understanding how SGOs will be identified/created and how they will identify eligible schools will be essential.

Our team of higher education and exempt organization tax professionals can help you understand the program and best next steps.