The $1,700 Federal Scholarship Tax Credit Starts January 1: What Nonprofits Must Decide Before the December 1 Comment Deadline

Most charitable tax incentives are worth only what a donor saves on their marginal tax rate. A $1,000 gift from a donor in the 24% bracket costs that donor about $760, and only if they itemize. Starting January 1, 2027, one kind of gift costs nothing net. A donor who gives $1,700 to a qualifying scholarship organization can claim a $1,700 reduction in federal tax owed.

The Chronicle of Philanthropy calls this the first federal tax credit for charitable giving. The Federal Scholarship Tax Credit (FSTC), codified at 26 U.S.C. § 25F by last year's reconciliation law, has been mostly a K-12 school-choice debate. But it is also a new fundraising tool, and it will move money within the nonprofit sector. Treasury's proposed rules (Federal Register 2026-20277, RIN 1545-BR97) are still open for comment until December 1, 2026. A public hearing is scheduled for December 15. Regulations.gov already showed more than 22,000 comments filed by early November.

Development directors, education nonprofits, and the foundations that fund them should all understand how it works.

How the Credit Works

The statute is short:

• Cap: "The credit allowed... to any taxpayer for any taxable year shall not exceed $1,700." The IRS FSTC page says married couples filing jointly "may each be able to claim a $1,700 credit, for a total credit of $3,400 on the joint return."
• Nonrefundable, with a five-year carryforward. A donor with too little tax liability to use the full credit in one year can carry it forward.
• Reduced by any state credit for the same contribution. Treasury says the proposed rules include "a taxpayer-favorable ordering rule" for donors who could claim both.
• Timing: it applies to taxable years ending after December 31, 2026. The IRS describes it as beginning "Jan. 1, 2027" for tax year 2027.

The credit is available whether or not the donor itemizes. Under the standard deduction, about nine in ten filers get no tax benefit from charitable gifts. For a household with a federal tax bill above $1,700, this gift costs nothing after taxes, and that will drive donor behavior in 2027.

Who Can Receive the Money

Only a scholarship granting organization (SGO) can receive a qualifying gift. Under § 25F(c)(5) and (d), an SGO must:

• be a 501(c)(3) public charity. Private foundations do not qualify.
• keep qualified contributions in one or more separate accounts.
• serve 10 or more students who do not all attend the same school.
• spend "not less than 90 percent of the income of the organization on scholarships for eligible students." The Chronicle, reporting on the draft rules, describes the requirement as disbursing 90% of each donor's contribution within two years. Check the final text before relying on either reading.
• give priority first to prior-year recipients, then to their siblings.
• not "earmark or set aside contributions for scholarships on behalf of any particular student."
• verify household income and limit awards to eligible students. That means children "eligible to enroll in a public elementary or secondary school" whose household income does not exceed 300% of area median gross income, the same AMGI measure used for the Low-Income Housing Tax Credit.

Scholarships can pay for qualified K-12 expenses defined by cross-reference to § 530(b)(3)(A). Treasury's October 1 announcement (IR-2026-117) lists "private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other equipment." Scholarships are not limited to tuition. Tutoring and supplemental services qualify, which brings in organizations well outside private-school scholarship funds.

Treasury expects 600 to 700 SGOs by 2030, funding "as many as 2.2 million scholarships each year." It estimates that about 96% of children in participating states would meet the income test. At 300% of AMGI, the benefit reaches well into the middle class.

Thirty States In So Far

Each state decides whether to take part. A state becomes a "covered State" only if it "voluntarily elects to participate," through the governor or another official designated under state law, by filing IRS Form 15714. The state must then certify a list of SGOs through the IRS's FSTC State Portal. The statute sets that deadline at January 1 of each year, or "as early as practicable" in the first year.

As of October 22, 2026, the IRS participating-states list had 30 states: 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.

Two details matter more than the count:

1. Donors are not limited by where they live. In a correction, the Chronicle notes that a donor can claim the credit for a gift to an SGO in an opted-in state even if the donor's own state has not opted in. A donor in California or New York can give to an Ohio or Texas SGO and claim the full credit. SGOs in participating states can raise money nationally, and nonprofits in non-participating states have no SGO of their own to offer donors, which may send some of those donors' gifts out of state.
2. The list will change. States with new governors after the midterms may opt in or out, and the Chronicle expects more to join. Elections affect this program directly, because a governor's signature, and only a governor's signature in most states, decides whether a state's nonprofits can serve as SGOs.

The Open Questions the Comment Period Can Still Settle

The statute bars earmarking for a particular student. According to the Chronicle, the draft rules "did not clarify whether donors can steer money they give to an SGO to a specific school." For school development offices, this is the main question. Brian Flahaven of CASE told the Chronicle, "They made it clear you can't designate that a gift goes to a specific student." CASE is seeking guidance on school-level designation. Some SGOs, such as ACE Scholarships, already run school-branded donation pages where gifts are "earmarked for that school."

If Treasury's final rule allows school designation, every private school's advancement office will have reason to partner with an SGO and send annual-fund donors through it. If it bans designation, SGOs operate more like pooled funds, and schools have to rely on an SGO's distribution rules.

Other issues worth raising before December 1:

• How the 90% rule applies. It could be read as 90% of income, as the statute says, or 90% of each donor's gift within a fixed period, as reported from the draft rules. The second reading would make it harder for SGOs to build reserves.
• Verification burden. Checking income against 300% of AMGI for every family costs money. Smaller SGOs and tutoring-focused nonprofits have the most to gain from rules that allow simple documentation.
• Supplemental-service providers. Organizations that provide tutoring or special-needs services need clarity on whether and how they can receive scholarship payments without also being SGOs.

Comments go through regulations.gov docket IRS-2026-1354. Requests to speak at the December 15, 10 a.m. ET hearing, with outlines, are due December 1. Requests to attend are due December 10 at 5 p.m. ET. If no outlines arrive by December 1, the hearing is cancelled. Regulations.gov metadata shows a December 2 close date, but the Federal Register notice says December 1. File by the earlier date.

What Nonprofit Leaders Should Do Now

Education nonprofits in the 30 participating states: decide whether to become an SGO, partner with one, or stay out. Becoming an SGO requires public-charity status, segregated accounts, income verification, and a 10-student, multi-school footprint, and the state must certify the organization onto its list. Contact the governor's designated office now. The list is due by January 1, and missing the first year means missing the first year of donor demand.

Development directors at schools: map which of your annual donors owe more than $1,700 in federal tax. For them, a gift through an SGO costs nothing after taxes. Plan the 2027 appeal around the credit, but do not promise school-specific designation until the final rule settles it.

Nonprofits outside K-12 education: watch for substitution. A donor who used to give $1,000 to a food bank may give $1,700 to an SGO instead, because it costs them nothing after taxes. The Fundraising Effectiveness Project already shows donor counts falling. A new credit worth up to $3,400 per household is a competitor for year-end gifts. Expect to explain more clearly why your mission is worth an after-tax cost.

Foundations: private foundations cannot be SGOs, but they can fund the infrastructure: verification systems, multi-school consortia, and SGO capacity in rural districts where few private schools exist and tutoring is the more likely use.

Whether the credit becomes a large new revenue stream or mostly redirects existing giving depends on decisions made in the next seven weeks: the comments filed by December 1, the hearing on December 15, and the state SGO lists due January 1.

Nonprofits adjusting their 2027 fundraising plans for the credit can use Granted to find foundation and government funding that does not depend on how Treasury writes the final rule.