Federal Scholarship Tax Credit Regulations Set for 2027
The Treasury has released final rules for the Federal Scholarship Tax Credit Program.
The U.S. Treasury and IRS have released final regulations for the Federal Scholarship Tax Credit program. Starting in 2027, individuals can claim a dollar-for-dollar tax credit of up to $1,700 for donations to qualifying scholarship-granting organizations. Married couples filing jointly can claim up to $3,400. All donated funds must flow through these organizations and be used for eligible K-12 education expenses.
Eligible expenses are broad. They include tuition, fees, books, and technology. Room and board, uniforms, and transportation also qualify. The law covers extended day programs, special needs services, and academic tutoring. The scholarship-granting organizations have sole authority to decide scholarship sizes and which students receive them. The law sets no specific scholarship amount or cap. Students can use these scholarships across state lines.
State participation and opt-in process
State participation is not automatic. Each year, the governor or relevant tax authority in all 50 states and the District of Columbia must choose to opt in. Taking no action means the state does not participate. There is no penalty for either decision. Once a state opts in, its ability to regulate the program is severely restricted.
States cannot add their own requirements for scholarship organizations operating within their borders. They cannot direct how the money is used or influence scholarship size or allocation. States are also prohibited from requiring that scholarships target low-income families. If a state opts in, it must allow all eligible organizations to operate, including those providing scholarships for private schools.
The federal parameters for these organizations are specific. To qualify, an organization must be a nonprofit, not a private foundation. It must use 90% of its income for scholarships for at least ten eligible K-12 students, with at least two attending different schools. It cannot earmark funds for specific students. It must prioritize previous recipients and their siblings in most cases. Donated funds must be kept separate from other money, and self-dealing is prohibited.
Funding estimates and financial impact
Official estimates project a significant fiscal impact. The Congressional Joint Committee on Taxation said it "estimates the FSTC Program will reduce federal revenue by $25.9 billion over 10 years." In its first year, 2027, about $500 million in taxpayer-subsidized donations is expected to be available. Over the first eight years, an average of $3.2 billion annually could flow to scholarship organizations.
A different estimate from the Treasury puts the annual figure much higher. The Treasury said it "puts the figure at $26 billion annually by 2030."
Eligibility is based on household income, defined as money actually received by the family. The income limit is set at 300% of the area median gross income. This ceiling can be $500,000 or more annually for a family of four in some regions. Analyses suggest between 90% and 96% of families would fall under this limit.
Implications for schools and accountability
The program directs funds away from public school districts. Scholarship-granting organizations receive the taxpayer-subsidized donations and decide where the money goes. Public schools cannot be direct recipients. Private and religious schools that receive funds face minimal federal accountability.
There is no requirement for these schools to report total or scholarship-funded enrollment. They do not have to disclose tuition or fees. Many long-standing federal education protections do not apply. Unlike public schools receiving federal ESEA funds, private schools getting this money are not required to administer annual statewide tests in math and reading. Reporting on high school graduation rates is also not mandated.
The program does not allocate funding based on student need, such as poverty, and restricts states from requiring such targeting. Analysts suggest the structure may favor established organizations with existing resources. This could create structural barriers for underserved communities seeking to attract funding. The statute does allow funds to be used for services like after-school programs or tutoring, which could potentially benefit public school students.
Governors of Maryland and Delaware have until January 1, 2027 to opt in to the Federal Scholarship Tax Credit program.
