The Internal Revenue Service announced on June 8 that 27 states have elected to participate in the Federal Scholarship Tax Credit (FSTC) program, expanding access to a new education funding mechanism that allows taxpayers to redirect federal tax dollars to private scholarships. Beginning January 1, 2027, eligible taxpayers in these participating states will be able to claim a federal tax credit of up to $1,700 annually for cash contributions to Scholarship Granting Organizations (SGOs).
The program, enacted under the One Big Beautiful Bill, represents the first federal tax credit scholarship program in U.S. history. According to the IRS, the credit enables a dollar-for-dollar reduction in federal tax liability for qualifying donations made to SGOs that provide scholarships for elementary and secondary education expenses such as tuition, fees, tutoring, books, and other qualified costs.
The 27 participating states span a broad geographic and political range: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming. State participation in the program is voluntary, and the IRS will maintain an updated list as additional states complete the required election and submission process.
How the program works: Individual taxpayers donate to an approved SGO in a participating state. The SGO then awards scholarships to eligible students. Donors receive a nonrefundable federal income tax credit—meaning the credit reduces their federal tax liability but cannot generate a refund. Unused credits can be carried forward for up to five taxable years. The credit is capped at $1,700 per taxpayer per year, though scholarship amounts awarded by SGOs are not capped and will vary based on each organization’s funding and priorities.
Eligibility for students typically requires that they be eligible to attend a public elementary or secondary school and that their family income fall below 300 percent of the area median income, according to education policy sources. This income cap is designed to ensure scholarships reach low- and middle-income families seeking educational alternatives.
The IRS noted in its announcement that the program “promotes and supports elementary and secondary education,” signaling federal backing for the expansion of education choice through private donations. The agency encouraged additional states to participate, indicating that the administration views broader state adoption as important to the program’s success.
Tax credit scholarship programs have existed at the state level for years, but this is the first time the federal government has created a nationwide tax credit for education donations. The mechanism allows donors to effectively redirect a portion of their federal tax obligation toward private scholarship funding rather than the federal treasury, creating a new pathway for private philanthropy in K-12 education.
Sources
- Internal Revenue Service — June 8, 2026 announcement (IR-2026-76) confirming 27 states’ participation and program mechanics
- EdChoice — Explanation of how the federal tax credit for scholarships works and its implications for families
- Commonwealth Foundation — Details on the FSTC program structure and dollar-for-dollar donation mechanics
- Bipartisan Policy Center — Overview of the scholarship tax credit framework and nonrefundable credit provisions
