How the New $1,700 Scholarship Credit Works
On October 1, 2026 the IRS released guidance on section 25F, the federal scholarship tax credit created by section 70411 of the One Big Beautiful Bill Act (P.L. 119-21). The package is temporary regulations in T.D. 10057 and proposed regulations in REG-117199-25, both published in the Federal Register on October 2, 2026. The credit applies to taxable years ending after December 31, 2026, so the first return it touches is your 2027 return.
The newsletter gave you the shape. Here are the mechanics.
What the credit is
Section 25F is a nonrefundable personal credit for individuals who give cash to a certified scholarship granting organization, an SGO. The SGO uses the money to fund K-12 scholarships. You get a federal credit for what you gave, subject to the limits below.
The three limits
The cap is $1,700. Section 25F(b)(1) caps the credit at $1,700 for any taxpayer for any taxable year, so a joint return tops out at $3,400. It's a cap on the credit, not a percentage of what you give. Give $1,700 and the credit is $1,700. Give $10,000 and the credit is still $1,700.
It's nonrefundable. The credit can take your federal income tax to zero, but it can't take it below zero and hand you a refund. If your tax for the year is $600, that's the most it does for you this year.
Unused credit carries forward five years. Section 25F(f)(2) lets you carry the excess forward, but not past the fifth taxable year after the year the credit arose. The carryforward runs first-in, first-out, so the oldest credit gets used first.
Back to that $600 example. You use $600, $1,100 carries forward, and you have five years to use it.
How a state credit changes the math
Several states already run their own scholarship credit programs. If you take a state credit for the same gift, the federal credit shrinks, and the ordering matters.
Proposed §1.25F-2(c)(1) makes the credit the lesser of two numbers. The first is your qualified contributions for the year, reduced (but not below zero) by any state credits with regard to those contributions. The second is $1,700.
The state credit comes off your contribution, not off your credit. The regulation's own Example 1 at proposed §1.25F-2(h) runs it. A $2,500 qualified contribution with a $500 state credit allowed. Subtract the state credit from the contribution and you have $2,000. Take the lesser of $2,000 and $1,700, and the federal credit is the full $1,700. The state credit cost you nothing federally.
Shrink the gift and the answer changes. A $1,700 contribution with that same $500 state credit leaves $1,200, which is under the cap, so the federal credit is $1,200.
In other words, giving above the cap builds a cushion against the state offset. Giving exactly at the cap doesn't.
You can't also deduct it
Any qualified contribution for which the 25F credit is allowed can't be taken into account as a charitable contribution under section 170. No double benefit on the same dollar.
The part of your gift that doesn't go into the credit is a different story. Give $5,000, use $1,700 for the credit, and the remaining $3,300 may still be deductible under section 170 if it meets the usual requirements.
Your state has to opt in
This is the gate, and it's the one most people will trip over.
The credit only works for gifts to SGOs on a participating state's certified list, and participation is voluntary. Under section 25F(g)(1)(A), the election is made by the governor, or by whatever official, agency or entity state law designates to make federal tax elections for the state.
The timing for the first year is its own rule. A state makes an advance election on Form 15714 by January 1, 2027, then perfects it by submitting its certified SGO list by February 15, 2027. For 2028 and later, the advance election window runs January 2 through September 30 of the preceding year, and the list is due by January 1 of the election year.
If your state never elects in, there's nothing in that state to give to. If it elects in and later pulls an organization off its list, removal is effective immediately, and contributions made after removal aren't qualified contributions.
What makes an organization an SGO
The requirements are specific. An SGO has to be a 501(c)(3) exempt under 501(a), and not a private foundation. It has to provide scholarships to ten or more students who don't all attend the same school. It has to spend at least 90 percent of its income on scholarships for eligible students.
It has to award scholarships with priority first to students who had one the previous school year, then to siblings of students who had one. And it can't earmark or set aside contributions for any particular student, so you can't route a gift to your own kid and call it a credit.
It also can't commingle. Qualified contributions go into a segregated section 25F account, with a complete set of books and records kept for it.
Who the scholarships go to
An eligible student has to be eligible to enroll in a public elementary or secondary school, and has to live in the covered state, with exceptions for military dependents and students on Indian Lands.
The income test is household income no greater than 300 percent of area median gross income, measured using section 42 standards modified to exclude non-cash items. That is a wide net. Treasury's own estimate is that roughly 96 percent of children in participating states would qualify.
Scholarships cover qualified elementary or secondary education expenses described in section 530(b)(3)(A). Treasury has said guidance on the specific permissible expenses is still in development.
What counts as a contribution
Cash only. The regulations define cash as physical currency, check, money order, electronic transfer including credit or debit card, after-tax payroll deduction, or a similar method, in U.S. dollars. Digital assets are excluded.
You also have to designate the gift as a qualified contribution at the time you make it. That isn't something you sort out at filing.
The paperwork
The SGO assigns you a unique donor number. By January 31 following the contribution year it has to give you a written acknowledgment showing its EIN, your total qualified contributions designated during the year, your unique donor number, whether you received any goods or services in consideration, and a good faith estimate of their value if you did.
You report that unique donor number on Form 8525. Separately, by February 28, the SGO reports donor names, addresses and aggregate contributions to the IRS through its portal.
Keep the acknowledgment. A credit you can't tie to a donor number is one you'll have trouble defending. One you can tie out supports itself.
A note for business owners
Section 25F sits with the nonrefundable personal credits. It's an individual credit. Your S corp can't take it, your partnership can't take it, and a C corp can't take it.
If you normally give through the business, the gift has to come from you personally to produce a 25F credit. For an S corp or a partnership that's a modest change in which account the check comes out of. For a C corp owner it's a real decision, because the corporation gives up its section 170 deduction on that money and you pick up a capped personal credit instead. Run it both ways before you move anything.
What's still open
The proposed regulations are proposed. Comments are open, the expense guidance under section 530(b)(3)(A) hasn't landed, and no state has published a certified SGO list yet, because none can until the election machinery runs.
What's settled is the shape. $1,700 per person, nonrefundable, five-year FIFO carryforward, state credits net against the contribution before the cap, no charitable deduction on the credited dollars, and your state has to be in.
If you give to K-12 scholarships already, the move between now and the end of 2026 is finding out whether your state is electing in and which organizations will be on the list. The gift itself is a 2027 decision.
Figures verified at the Federal Register publication of T.D. 10057 and REG-117199-25 (Vol. 91, No. 190, October 2, 2026) and at IR-2026-117 (October 1, 2026). Every situation is different. Talk to your CPA before you move money.
