The One Big Beautiful Bill Act (OBBBA), passed by the 119th U.S. Congress and signed into law on July 4th, 2025, introduces several sweeping tax and funding reforms. Among these, one provision has sparked particular interest—and, frankly, some misconceptions—among nonprofits and individual taxpayers: a new federal scholarship tax credit program.
Key Takeaways
- A New Tax Credit: Taxpayers may claim a nonrefundable federal credit of up to $1,700 for donations to qualified Scholarship Granting Organizations (SGOs) operating in states that opt in.
- Scholarships Are Tax-Free Starting 2027: Eligible families can use scholarships for a wide range of K–12 education expenses, and awards will be excluded from federal income starting in 2027.
- States Control Access: The credit is only available for donations made to SGOs in “Covered States” that have elected to participate; this may create potential state-by-state differences.
The provision is designed to incentivize private donations to Scholarship Granting Organizations (SGOs), which in turn provide funding to help eligible students pay for elementary and secondary education expenses. This program has been talked about in some circles as a potential windfall, with rumors of liberal tax breaks and government-funded generosity. Time to think again.
The opportunity here is real but measured—and only accessible to those who carefully follow the rules.
What the Law Offers to Taxpayers
Under the OBBBA, individual taxpayers who are U.S. citizens or residents may claim a nonrefundable federal tax credit of up to $1,700 annually for donations made to qualifying SGOs. To be clear, this is not a deduction; this is a credit that directly reduces the tax you owe. But it’s also nonrefundable, meaning it can’t exceed your tax liability.
If you’ve also claimed a state-level credit for the same contribution, the federal credit will be reduced accordingly. You also can’t double-dip by taking a charitable deduction on the same gift. However, if your credit exceeds your tax liability in a given year, you may carry it forward for up to five years.
There’s a catch: this credit only applies to donations made to SGOs operating in states that elect to participate in the program. Additionally, a taxpayer making a donation to a nonprofit SGO cannot receive a federal credit unless the state in which it operates has formally joined the program, and its governor has designated it as eligible.
What It Means for Nonprofits
For nonprofits dedicated to awarding scholarships, this provision opens up a new funding channel—if they meet strict criteria to qualify as SGOs under the law.
To participate, an organization must be a 501(c)(3) nonprofit that is not classified as a private foundation. It must also operate in a state that has opted in, be listed by that state, and submitted by the state to the Secretary of the Treasury. Contributions can only be used within the state in which they are received and must be kept in separate accounts that do not commingle with other funds.
Operational requirements are precise. SGOs must award scholarships to at least ten students (and not all from the same school), and 90% of revenues must go directly toward scholarships. These scholarships may only be used for qualified elementary and secondary education expenses, such as tuition, books, supplies, tutoring, and certain support services.
Importantly, organizations cannot earmark donations for specific students, nor can they provide scholarships to board members, substantial donors, or their family members. Prioritization is also required—SGOs must give first consideration to students who received scholarships the previous year, and then to students with siblings who have received one.
To determine eligibility, SGOs must verify family income and household size, and we expect that future regulations will provide required guidelines for SGOs to adhere to.
State Participation: The Covered State Requirement
For the program to function, states must elect to participate. States must notify the Secretary of the Treasury of their election and provide a list of SGOs designated as eligible within their state.
States, in other words, serve as the gatekeepers to this federal credit. Without state-level action, residents cannot benefit from it—even if they meet every other requirement.
We are watching closely to see how states will respond. It is unclear whether states will be allowed to impose additional requirements on SGOs beyond what is outlined at the federal level. If so, this could lead to a patchwork system where nonprofit eligibility and donor benefits vary significantly by geography.
For instance, a state could conceivably require SGOs to meet higher financial thresholds, undergo additional audits, or limit scholarship eligibility based on local criteria. That might shift the picture considerably, especially for smaller nonprofits hoping to participate.
We’ll know more once the final federal regulations are issued, but until then, this remains an area of uncertainty and one worth monitoring.
The Nuts and Bolts: Who Qualifies for the Scholarships
Families that benefit from SGO scholarships must also meet clear criteria. The program is targeted at students from low- to moderate-income households, specifically those with income at or below 300% of the Area Median Gross Income (AMGI). The student must also be eligible to enroll in a public elementary or secondary school, even if the scholarship is used for a private or alternative education option.
The scholarships can be used for a wide range of expenses, including tuition, fees, academic materials, tutoring, special education services, transportation, and room and board, depending on the student’s needs.
An additional benefit: beginning in 2027, these scholarships will be excluded from gross income for federal tax purposes. That’s a meaningful financial advantage for recipient families.
Timing and Takeaways
The scholarship tax credit and related provisions will apply to tax year 2027 and forward. That means nonprofits, donors, and state governments have some time to prepare—but should start planning now to ensure compliance.
The income exclusion for scholarship recipients will take effect January 1, 2027.
Final Thoughts
The OBBBA scholarship provision is not a shortcut to wealth or a dramatic upheaval of the education system. But it is a well-structured opportunity for taxpayers to receive a moderate tax benefit while supporting expanded access to education through eligible nonprofits.
To take advantage of it, participating individuals, organizations, or state governments, will need to follow the rules, stay informed, and prepare thoughtfully. The program offers real benefits, but only to those who meet its reasonable, but clearly defined, requirements.
Common Taxpayer Questions
- How much will my credit be if I file jointly—$1,700 or $3,400?
Most likely $1,700 total per return, not per person. When the tax code is silent, it typically means the limit applies per return, not per filer. The IRS is unlikely to double the credit for joint filers. - Can I still deduct my donation if I claim the tax credit?
No. Contributions used to claim the SGO credit cannot also be deducted as charitable donations on your federal return. - What happens if my state doesn’t participate?
If your state doesn’t opt in, it is likely that you can still claim the federal credit, but only if you donate to an SGO in a participating state. Regulations are expected to be released outlining how this will be addressed.
