Federal Scholarship Tax Credit 2027: The New $1,700 Credit Explained

On Oct. 1, 2026, Treasury and the IRS released proposed regulations for the federal scholarship tax credit 2027 launch (IR-2026-117). It's the first federal tax credit for private donations that fund K-12 scholarships, and it works very differently from an ordinary charitable deduction. If you give to charity every year, or you're already planning your 2027 giving, here's what you need to know.

How the $1,700 school choice tax credit works

A tax credit reduces your tax bill dollar for dollar. A deduction only reduces the income your tax is figured on. That difference is why this credit is getting attention.

A simple example: You give $1,700 in cash to an approved SGO in 2027 and owe at least that much federal tax. Your 2027 federal tax drops by $1,700. If you had instead deducted the same $1,700 as an itemized charitable gift in the 24% bracket, the deduction would have saved about $408. Giving more than $1,700 doesn't increase the credit.

What is a scholarship granting organization?

A scholarship granting organization is a 501(c)(3) public charity (not a private foundation) that a participating state has put on its list. Under section 25F, an SGO must:

• Spend at least 90% of its income on scholarships for eligible students.
• Serve at least 10 students who don't all attend the same school.
• Keep qualified contributions in separate accounts and verify each family's household income.
• Not let donors earmark a gift for a particular student.

Scholarships can go to students from households with income no more than 300% of area median gross income who are eligible to attend public school. They can pay for private-school tuition, tutoring, special-needs services, books, supplies, computers and other qualifying K-12 costs. Under the proposed rules, the IRS estimates about 96% of children in participating states would be eligible.

Which states opted in to the federal scholarship tax credit?

A state has to elect to participate and send the IRS its list of SGOs before donors can give to SGOs there. As of Sept. 14, 2026, the IRS lists 30 participating states for 2027: 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.

The list can change, so check the IRS participating-states page before you give.

The New Jersey federal scholarship tax credit question

New Jersey isn't on the IRS list as of Sept. 14, 2026, so there are no New Jersey SGOs for this credit right now. That doesn't shut New Jersey taxpayers out. The IRS says taxpayers may contribute to an SGO in any participating state, regardless of where they live. In practice, that means:

• A New Jersey resident can give to an approved SGO in, say, Virginia or Ohio and claim the federal credit, if the gift otherwise qualifies.
• The money funds scholarships in the SGO's state, not New Jersey, because a qualified contribution has to fund scholarships in the state where the SGO is listed.
• If New Jersey opts in later, check the IRS page again for New Jersey SGOs.

How to claim the education freedom tax credit in 2027

1. Wait for Jan. 1, 2027. A 2026 gift to a scholarship charity is a regular charitable gift, not a section 25F contribution.
2. Confirm the SGO is listed. Under the proposed rules, you can generally rely on an SGO's inclusion on the IRS SGO list when you give.
3. Give cash (check, card or bank transfer). Don't donate appreciated stock for this credit.
4. Keep the acknowledgment. The SGO will send a donor acknowledgment. The proposed rules use a unique donor number so SGOs don't need your Social Security number.
5. Plan for your tax liability. The credit is nonrefundable. If your 2027 federal tax is lower than the credit, the unused part carries forward up to five years.
6. Don't double count. Leave the credited amount out of your itemized charitable deductions, and tell your preparer if you also got a state credit for the same gift.

The regulations are still proposed, so details can change before they're final. Treasury and the IRS say taxpayers, states and SGOs can rely on the proposed rules for contributions starting Jan. 1, 2027.

Doing other year-end planning? See our guide to Section 179 vs. bonus depreciation for 2026.

Quick answers

When does the federal scholarship tax credit start?

Jan. 1, 2027. It applies to tax years ending after Dec. 31, 2026, so the first credits go on 2027 returns filed in 2028.

How much is the $1,700 school choice tax credit worth?

Up to $1,700 off your federal tax per person per year ($3,400 for a married couple filing jointly), for cash gifts to approved SGOs. It's nonrefundable, and unused credit carries forward five years.

Can I also deduct the donation as a charitable contribution?

No. A contribution that's credited under section 25F can't also be deducted as a charitable gift.

Is New Jersey participating in the federal scholarship tax credit?

Not as of Sept. 14, 2026. New Jersey residents can still give to an approved SGO in any of the 30 participating states and claim the federal credit.

Does donating stock qualify for the section 25F credit?

No. Only cash contributions qualify.

Not sure whether this credit beats your usual giving strategy? Merchant Financial Advisory (MFA), an accounting and tax solutions provider in Princeton, New Jersey, helps individuals and small and mid-sized businesses plan the year ahead. See our tax planning services, or book a quick call below.