Federal Scholarship Tax Credit: Q&A Guide

A major new tax credit quietly arrived with last year’s omnibus budget reconciliation bill, opening a new opportunity for existing or prospective educational organizations to incentivize scholarship donations.

The One Big Beautiful Bill Act (“OBBBA”) created the new Federal Scholarship Tax Credit (the “FSTC”) worth up to $1,700 for qualifying contributions made by individuals to scholarship-granting organizations. This alert provides an overview of the general rules and the FSTC guidance that has been released as of March 30, 2026, including how organizations can qualify as scholarship-granting organizations (“SGOs”), limitations for claiming the FSTC and related open issues that still need to be addressed—all in question-and-answer format.

Brownstein played a pivotal role in getting the FSTC passed into law and is working with policymakers in Washington, D.C., on forthcoming guidance to clarify aspects of the statutory language. The FSTC is a major benefit for public and private educational organizations, and we want to help interested organizations implement and benefit from it. Accordingly, (1) if your existing organization is interested in qualifying as an SGO, (2) if you are interested in forming a new organization as an SGO or (3) if you are otherwise interested in learning more about the FSTC, please contact any of the Brownstein National Tax Policy Group attorneys listed as contributors.

As of March 30, 2026, the following FSTC guidance has been provided:

• IRS Notice 2025-70

• Revenue Procedure 2026-6

• U.S. Departments of Education and Treasury Fact Sheet

OVERVIEW

What is the FSTC”?

The FSTC is a nonrefundable tax credit for up to $1,700, for qualified contributions made by a taxpayer to scholarship granting organizations to provide scholarships for qualified elementary or secondary education expenses.

Taxpayers may begin claiming the FSTC for qualifying contributions made after Dec. 31, 2026. Taxpayers will claim the FSTC generated in 2027 on their 2027 returns (which will be filed in 2028).

Note: While not clear from the statutory text, forthcoming guidance is anticipated to provide that the credit is limited to $1,700 per return. Thus, a couple that files as married filing jointly is expected to be limited to a credit of $1,700, not $3,400.

How does the FSTC work?

Very generally, a state must first opt-in to become a “covered state.” A covered state means one of the 50 states or Washington D.C. that elects to participate in the FSTC and identify qualifying SGOs in its state. A state’s governor (or other person or entity designated under state law) can make the election to opt-in on behalf of the state. At present, states may make an advance election to participate for calendar year 2027 using IRS Form 15714.

Once a state has opted in, each year (by Jan. 1, or as early as practicable for the first year), such covered state must provide a certified list to the Secretary of Treasury that includes the organizations located in such state that qualify as SGOs.

Then (once a state has opted in and certified its list of SGOs), a taxpayer must make a qualified contribution to an SGO. Subject to certain limitations, the taxpayer would then claim the FSTC against their tax liability.

Who is eligible to claim the FSTC?

The FSTC may be claimed by individuals (not corporations or other entities) who are citizens or residents of the United States (limited to the 50 states and Washington, D.C.).

What is the amount of the FSTC?

As opposed to most tax incentives, the FSTC is a 100% nonrefundable credit for up to $1,700 per year. Accordingly, the FSTC causes a dollar-for-dollar reduction in a donor’s tax liability, up to the lesser of $1,700 per year or the taxpayer’s tax liability for such years.

For example, if a taxpayer made a $1,700 cash donation to an SGO but the taxpayer’s federal income tax liability was $700, the FSTC would be limited to $700 for the year. However, the remaining and unused $1,000 FSTC would be carried forward to the following year.

What is the FSTC carryforward?

Taxpayers whose FSTC amount exceeds their tax liability for the year can carry forward their unused FSTC amount for up to five (5) additional years, claiming it against tax liability in those years instead, on a first-in-first-out basis. However, for clarity, the maximum amount of the credit in any year is still $1,700.

For example, assume the taxpayer from the earlier example has a $1,000 FSTC carryforward from 2027 and then makes a $1,700 cash donation to an SGO in 2028. Before taking into account the FSTC, the taxpayer’s federal income tax liability for 2028 is $3,000. The taxpayer’s FSTC for 2028 is still limited to $1,700. Accordingly, the $1,000 FSTC carryforward amount from 2027 is taken first, $700 of FSTC from 2028 is taken second, and the remaining $1,000 FSTC from 2028 is carried forward to the following year.

Are there other limitations on the FSTC amount?

Aside from the FSTC limitations previously mentioned, the statute makes clear that double benefits may not be claimed for corresponding state credits and federal charitable contribution deductions.

Specifically, if an individual claims a state credit for a qualifying contribution to an SGO, the FSTC amount is correspondingly reduced. Similarly, an individual cannot use amounts to claim the FSTC and also treat the same amounts as a charitable contribution under I.R.C. Section 170.

DEFINITIONS AND OPERATIONAL CONSIDERATIONS

What is a qualified contribution?

To qualify for the FSTC, a contribution must be made:

• By an individual (not a corporation or other entity);
• In cash (and not in stock or other property); and
• To an SGO that uses such contribution to fund scholarships for eligible students within the state.

Note: Forthcoming guidance is expected to make clear that making a cash donation to a qualified SGO is sufficient for a donor to satisfy the third requirement (that the SGO actually use the donation to provide qualifying scholarships).

Who is an eligible student?

An SGO must provide scholarships to “eligible students,” meaning an individual who:

• Is from a household with no more than 300% of the area median gross income (for the calendar year prior to the date the student submitted a scholarship application);
• Is eligible to enroll in a public school (grades K-12); and
• Is not a disqualified person.

Note: Scholarship recipients do not include the scholarships in gross income (i.e., the scholarships are not taxable to recipients). 

Who is a disqualified person?

The statute provides that SGOs may not award scholarships to any “disqualified person,” determined under rules similar to I.R.C. Section 4946 (relating to the private foundation self‑dealing rules). The scope of a disqualified person is expected to be clarified in forthcoming guidance, but generally, the rules under I.R.C. Section 4946 identify persons and entities with close relationships with a given organization, such as:

• Substantial contributors (generally, donors whose aggregate contributions exceed $5,000 and exceed 2% of total contributions);
• SGO managers (generally, any officer, director or trustee or entity with similar powers/responsibilities) of the SGO;
• Certain 20% owners of entities that are substantial contributors to an SGO; and
• Family members (generally, spouse, ancestors, children, grandchildren, great‑grandchildren and the spouses of children, grandchildren and great‑grandchildren of any individual in the first three bullet points above).

Note: The IRS and Treasury have asked for comments on the definition of “disqualified person” and are considering adapting the I.R.C. Section 4946 “substantial contributor” definition to a pure 2% of total contributions standard without the $5,000 floor. We also anticipate that forthcoming guidance will clarify that SGO selection committee members and their family members are disqualified persons.

What are qualified elementary or secondary education expenses?

An SGO must provide scholarships for “qualified elementary or secondary education expenses” which means expenses for:

• Tuition, fees, academic tutoring, special needs services in the case of a special needs student, books, supplies and other equipment expenses incurred in connection with school enrollment or attendance;
• Room and board, uniforms, transportation, and supplementary items and services (including extended day programs) which are required or provided by a school in connection with enrollment or attendance, and
• Computer technology or equipment or internet access and related services, if such technology, equipment or services are to be used by the student and the student’s family during any of the years the student is in school; provided, however, it does not include expenses for computer software designed for sports, games or hobbies that are not predominantly educational in nature.

What is an SGO

An SGO is an organization that meets all of the following criteria:

• It is tax‑exempt under I.R.C. Section 501(c)(3) but is not a private foundation;
• It maintains separate accounts to prevent co‑mingling of qualified contributions and other amounts;
• It satisfies each of the SGO operational requirements described below; and
• It is included on the annual certified list submitted for the applicable covered state(s) for that year.

Note: As of March 30, 2026,the IRS’s “Where’s my application for tax-exempt status?” website (last updated Mar. 6, 2026), provides that 80% of determination letters are issued within 191 days. We anticipate that forthcoming guidance will address this issue, but at present, there is uncertainty as to whether a covered state would include an entity on its certified SGO list that has applied for (but not yet received) a determination letter from the IRS confirming its 501(c)(3) status.

To satisfy an SGO’s operational requirements, the organization must:

• Provide scholarships to at least 10 students who do not all attend the same school;
• Spend at least 90% of the organization’s income on scholarships for eligible students;
• Restrict scholarships to “qualified elementary or secondary education expenses”;
• First prioritize scholarships for prior‑year scholarship recipients, and then prioritize scholarships for siblings of recipients (before scholarships to persons that do not meet those criteria);
• Prohibit earmarking contributions for any particular student; and
• Verify household income and family size to limit scholarships to eligible students.

Note:The term “income” is not defined and is expected to be addressed in forthcoming guidance. However, depending on how the term is interpreted, it may be difficult for existing organizations to satisfy the 90% income requirements (e.g., if the term refers to all receipts, many existing organizations are unlikely to be structured in a way that would satisfy the 90% income criteria).

How do the SGO requirements apply to organizations operating in more than one state?

There are a number of open questions for multi-jurisdictional SGOs that are expected to be addressed in forthcoming guidance. To demonstrate some of these open issues, consider the following examples: 

• To be on a covered state’s certified list of SGOs, the SGO must be “located in the state.” Should organizations that are authorized to operate in a state be considered located in that state or should there be a requirement that the organization maintain an office or other physical presence in the state?
• The statute requires that qualifying contributions must be used to fund scholarships for eligible students “solely within the state in which the organization is listed.” Accordingly, should the requirement that the organization provide scholarships to 10 or more students who do not all attend the same school apply with respect to scholarships provided by the organization in the aggregate or on a state-by-state basis?
• Similarly, should the statutory requirement that an SGO spend not less than 90 percent of its income on scholarships for eligible students apply with respect to the organization’s operations in all states in the aggregate or on a state-by-state basis?

What records are SGOs required to keep?

The statute directs Treasury to issue guidance on recordkeeping and information reporting requirements to ensure compliance and to facilitate matching of donor credits and recipient eligibility.

While the guidance is still forthcoming, we anticipate that required records and reporting will include:

• An annual IRS form or similar schedule for reporting;
• Data on each qualified contribution (including donor taxpayer identification numbers) so the IRS can reconcile credits; and
• Information on each scholarship recipient to confirm eligibility and qualified expense use.

The IRS has asked for comments on a number of other potential record-keeping requirements, including:

• Verifying household income for “eligible students” (e.g., by collecting most recent federal income tax returns for each household member with a filing obligation and alternative documentation for non‑filers); and
• Procedures applicable to multistate SGOs.

Note: Until definitive guidance comes out (and based on Treasury and IRS indications as to particular interpretations of certain record-keeping requirements), SGOs should consider implementing:

• Contribution intake controls that capture donor identity, TIN, covered State designation, payment method and whether any state tax credit is expected,
• Issuing contemporaneous written acknowledgments to donors that are tailored to the statutory requirements;
• Segregated bank accounts and ledgers for qualified contributions (and, for multistate SGOs, sub‑accounts per state) with monthly reconciliations and documented policies preventing transfers that would co‑mingle funds;
• Scholarship award files with income verification documentation tied to the prior‑year household income rule, priority determinations and confirmation of qualified expense use, along with a disqualified‑person pre‑award check; and
• Compliance mechanisms showing 90% income‑to‑scholarship spending, 10‑student minimum “not all at one school,” and state‑specific metrics for multistate operations, to support both state annual re‑certification and potential IRS review.

Please reach out on the FSTC to any of the contributors from Brownstein’s National Tax Policy Group.