Tax Planning
Understanding Federal Scholarship Tax Credit (FSTC) Begins Jan 2027: What Individuals & States Need to Do
Starting Jan 1, 2027 taxpayers in participating states may claim a federal credit for donations to SGOs—up to $1,700, but only if their state elects in and sets up qualified organizations.
By NomadicTax Research Team • 6 min read • August 28, 2026
## What Is the Federal Scholarship Tax Credit (Section 25F)?
- Under **IRC § 25F**, beginning **January 1, 2027**, **individual taxpayers** may claim a **federal tax credit** of up to **$1,700** for certain **cash contributions** to **Scholarship Granting Organizations (SGOs)**. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc?auHash=OZQJ_D5_-GOnBfR7us_iJrOO1WVO8qHrql3hixw3SOA&utm_source=openai))
- The credit is only available if your **state (or D.C.) elects to participate** and posts a list of SGOs in that state. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc?auHash=OZQJ_D5_-GOnBfR7us_iJrOO1WVO8qHrql3hixw3SOA&utm_source=openai))
## State Participation & What It Means
As of **July 24, 2026**, **27 states** have elected to participate.—that includes: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wyoming. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc?auHash=OZQJ_D5_-GOnBfR7us_iJrOO1WVO8qHrql3hixw3SOA&utm_source=openai))
If your state is **not yet on the list**, donations to SGOs in that state will **not be eligible** for the federal tax credit—unless the state elects in later and publishes the required list.
## What Individuals Should Know & Do
- **Check your state’s status** on the IRS website to confirm if it has elected to participate. If yes, that state must also publish a list of qualified SGOs. Only then can individuals make qualifying contributions. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc?auHash=OZQJ_D5_-GOnBfR7us_iJrOO1WVO8qHrql3hixw3SOA&utm_source=openai))
- **Make contributions before Dec 31, 2026**, to SGOs in participating states, for the credit in your **2027 return**. Contribution timing matters.
- Contributions must be **cash-only**, and to an SGO that meets IRS/DC/state’s rules. Keep receipts and confirmation.
- **Limit is $1,700** per taxpayer all states combined. Multi-state donations don’t create extra credit unless to SGOs in different participating states—but documentation must support eligibility per state.
## What States Need to Do
- States must make an **Advance Election** under § 25F to participate **for tax year 2027**. That includes submitting lists of qualified SGOs to the IRS. ([irs.gov](https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc?auHash=OZQJ_D5_-GOnBfR7us_iJrOO1WVO8qHrql3hixw3SOA&utm_source=openai))
- Ensure those SGOs **meet rules**: elementary/secondary education scholarships, proper governance, reporting etc. States already on board have taken those steps.
- Publicize the SGOs and required state list so donations are valid for the credit.
## Example Scenarios
**Scenario A – Emily in Texas**
- Texas is participating.
- Emily donates $1,500 to a participating SGO in Texas in December 2026.
- On her 2027 federal return, she claims a $1,500 FSTC credit. She needs to confirm the SGO is on the Texas list.
**Scenario B – Bob in a non-elected state**
- Bob lives in a state that hasn't made the election.
- Even if he donates to an SGO, he *cannot* claim the federal credit until his state elects in and publishes required list.
## Summary
The FSTC under Section 25F presents a powerful incentive for individuals and states to promote education support through SGOs. If your state participates, individuals can reduce their federal tax liability by up to $1,700 for qualifying contributions starting in **tax year 2027**. Keep proof of donations, watch your state’s status, and ensure SGOs are recognized. This is a relatively new credit—with deadlines and state-specific conditions, so preparation is key.
**Category**: Tax Planning | Digital Nomad (if abroad and engaging in US donations)