The federal scholarship tax credit under Section 25F gives an individual a dollar-for-dollar credit of up to $1,700 a year for cash gifts to an approved scholarship granting organization (SGO), starting with contributions made on or after January 1, 2027. It only works in states that elect to participate, and any state tax credit for the same gift reduces it.
As of October 22, 2026, 30 states have opted in for 2027, the IRS has published temporary regulations and a separate set of proposed regulations, and donors will claim the federal scholarship tax credit on a new Form 8525. This guide covers how the credit is calculated, which states are in, what the October 2026 temporary and proposed regulations say, and a worked example you can check against your own numbers.
Section 25F was added to the Internal Revenue Code by the One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025. The statute at Cornell LII allows a credit to a US citizen or resident equal to "the aggregate amount of qualified contributions made by the taxpayer during the taxable year," capped at $1,700.
A qualified contribution is a charitable gift of cash to an SGO that uses the money to fund scholarships for eligible students in the state where the SGO is listed. The scholarships pay for qualified elementary or secondary education expenses, which the statute defines by cross-reference to the Coverdell education savings account rules in section 530(b)(3)(A). That covers K-12 costs such as tuition, fees, academic tutoring, books and supplies at a public, private or religious school. College costs fall under different rules, covered in our guide to the American Opportunity Tax Credit.
Three features set this credit apart from an ordinary charitable gift:
The statute applies to taxable years ending after December 31, 2026. For calendar-year individuals, that means 2027 is the first year, and the first claims will appear on 2027 returns filed in 2028. A gift made in 2026 does not qualify.
The cap is $1,700 per taxpayer per year. The open question after enactment was whether a married couple filing jointly counts as one taxpayer or two. The IRS has now answered it. Its Federal Scholarship Tax Credit 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."
The proposed regulations, which are not yet final, explain the reasoning: Treasury and the IRS "interpret section 25F to limit the credit amount that may be claimed to $1,700 per individual taxpayer, allowing married couples filing jointly to potentially claim up to $3,400 on their joint tax return provided that each spouse has made qualified contributions of up to $1,700." Under that reading, each spouse has to make his or her own qualified contribution. A single $3,400 check from one spouse does not double the cap.
The credit is limited to individuals giving directly. The proposed rules would not allow a partner or S corporation shareholder to claim the credit for a gift the business makes, even if that gift passes through as a charitable deduction. Owners who already route state tax payments through an entity, as described in our article on how the pass-through entity tax works, should plan to make scholarship gifts personally.
States choose whether to participate. Section 25F(c)(1) defines a covered state as one that "voluntarily elects to participate under this section and to identify scholarship granting organizations in the State." Donors are not limited to their home state. The proposed regulations say a taxpayer "may contribute to any SGO without regard to the taxpayer's residence," so a resident of a non-participating state can still give to an SGO that a participating state has listed.
The IRS reported 27 participating states in news release IR-2026-76 on June 8, 2026. Its participating states page, updated October 22, 2026, now lists 30:
| Region | Participating states for 2027 (as of October 22, 2026) |
|---|---|
| South | Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia |
| Midwest | Indiana, Iowa, Kansas, Missouri, Nebraska, North Dakota, Ohio, South Dakota |
| West | Alaska, Colorado, Idaho, Montana, Nevada, Utah, Wyoming |
| Northeast | New Hampshire |
The list can still grow. Under the temporary regulations, a state must file Form 15714, the advance election to participate for 2027, on or before January 1, 2027, and then perfect that election by submitting its certified SGO list through the FSTC State Portal on or before February 15, 2027. Check the IRS page close to the date of any gift, since state websites may lag.
Section 25F(b)(2) reduces the federal credit "by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year." Many states already run scholarship tax credit programs, so this interaction matters for donors in those states.
The order of operations makes a real difference, and the proposed regulations take the donor-friendly reading. Treasury and the IRS say they interpret the statute "as limiting the credit to $1,700 only after applying the State credit reduction." The proposed formula is the lesser of:
Under the proposed rules, only state credits tied to qualified contributions would count in the reduction. If one gift is partly designated as a Section 25F contribution and partly not, the state credit would be treated as coming first from the undesignated portion, which keeps more of the federal credit intact. These are proposed rules, with comments due December 1, 2026 and a public hearing scheduled for December 15, 2026, so the final version could differ.
The table below applies the proposed formula to four donors. Each is assumed to have enough federal income tax to absorb the credit except where noted, and each gift is a cash contribution designated as a qualified contribution to a listed SGO in 2027.
| Donor | Qualified gift | State credit for that gift | Gift less state credit | Federal credit (lesser of that or $1,700) |
|---|---|---|---|---|
| A: single, state has no scholarship credit | $1,700 | $0 | $1,700 | $1,700 |
| B: single, larger gift | $2,500 | $500 | $2,000 | $1,700 |
| C: single, generous state credit | $1,700 | $850 | $850 | $850 |
| D: married couple, each spouse gives | $1,700 + $1,700 | $0 | $1,700 each | $3,400 on the joint return |
Donor B shows why the ordering rule matters. If the $1,700 cap applied first, the credit would be $1,700 minus $500, or $1,200. Under the proposed reading the state credit comes off the $2,500 gift first, leaving $2,000, and the cap then limits the credit to $1,700. The proposed regulations use the same $2,500 and $500 figures to explain why they reject the cap-first reading.
Donor C gives $1,700 but receives an $850 state credit, so the federal credit is $850. Giving more would raise the federal credit back toward $1,700, as long as the extra gift does not also generate an equal state credit. For example, if the state credit stays at $850, a $2,550 gift leaves $1,700 after the reduction and produces the full $1,700 federal credit.
Now take Donor A and assume that donor's federal income tax after other credits is only $1,000. The credit is nonrefundable, so $1,000 is used in 2027 and the remaining $700 carries forward to 2028. Any carryforward not used by the fifth year after 2027 expires.
A donor gets the credit only for gifts to an organization that meets every SGO test in the statute and appears on a state list. Under Section 25F(c)(5) and (d), the organization must:
Eligible students come from households with income no greater than 300% of the area median gross income and must be eligible to enroll in a public elementary or secondary school. Scholarship amounts received after December 31, 2026 are excluded from the family's gross income under new section 139K.
The temporary regulations, effective December 1, 2026, require each SGO to register through an IRS SGO portal. The IRS will publish an SGO list on irs.gov, and the proposed rules would let a donor generally rely on that list at the time of the gift.
The IRS describes a three-step process for donors on its FSTC page: make a qualified cash contribution to an approved SGO, tell the SGO the payment is a qualified Section 25F contribution, and file Form 8525, Federal Scholarship Tax Credit, "listing the required SGO and donor number."
The proposed regulations add the paperwork detail. These points are proposed and could change in the final rules:
Because the credit cannot be claimed on the same dollars as a deduction, it changes how some households should split their giving in 2027. A donor who itemizes may prefer to send the first $1,700 of education giving to a listed SGO and the rest to other charities, which keeps those other gifts on Schedule A. The 2026 rules for itemized giving, including the new 0.5% of AGI floor, are covered in our article on Schedule A's two-page format and the charitable floor, and the broader mechanics are in our Form 1040 itemized deductions guide.
Donors who take the standard deduction should compare the credit with the new charitable deduction for non-itemizers, explained in our piece on charitable giving in 2026. Retirees giving from an IRA should note that a qualified charitable distribution is a separate tool with its own rules, and the two should be planned together rather than assumed to stack.
Families also have other new child-focused provisions from the same law, such as the accounts described in our Trump Accounts explainer. Those rules are separate from Section 25F and have their own contribution limits.
When does the federal scholarship tax credit start? It applies to taxable years ending after December 31, 2026, and the IRS says the credit is available for contributions beginning January 1, 2027. The first claims will be on 2027 returns filed in 2028.
Can a married couple claim $3,400? Yes, under the IRS's current position on its FSTC page. Each spouse may claim up to $1,700 on a joint return, and the proposed regulations would require each spouse to make his or her own qualified contributions.
What if my state did not opt in? Your state's participation does not limit you as a donor. Under the proposed regulations, a taxpayer in one state may give to an SGO on another participating state's list and claim the credit, as long as the SGO is listed for that year.
Does a state scholarship tax credit reduce the federal credit? Yes. The federal credit is reduced by any state credit allowed for the same qualified contributions. The proposed rules would subtract the state credit from the total gift before applying the $1,700 cap.
Can I give stock or crypto? The statute requires a contribution of cash. The proposed regulations define cash to include checks, card payments and electronic transfers in US dollars and exclude digital assets, so appreciated stock and crypto would not qualify.
Madras Accountancy supports CPA firms and their clients with tax preparation, tax planning support and bookkeeping, including tracking new credits such as Section 25F across client returns. To discuss how we can help with the 2027 filing season, contact our team.
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