The One Big Beautiful Bill Act (OBBBA), signed into law earlier this year, brings a host of tax reforms. Among its more education-focused additions is a brand-new federal tax credit designed to incentivize private contributions to scholarship organizations.

Section 70411 of the OBBBA introduces a federal tax credit for make qualifying donations to state-certified scholarship-granting organizations (SGOs). These organizations provide scholarships for K-12 students to attend eligible private schools.

While the details are still evolving, the opportunity for taxpayers, especially those with a philanthropic focus to reduce their federal tax liability while supporting education, is worth a closer look.

How the new scholarship credit works

The scholarship credit is modeled after similar state-level programs that allow donors to fund private school scholarships in exchange for a state tax credit. With the OBBBA, this incentive is now available at the federal level, expanding its reach and appeal.

Here’s how it works:

• Taxpayers who make donations to eligible SGOs can receive a dollar-for-dollar federal tax credit.
• The credit is nonrefundable, which can reduce tax liability to zero but not below.
• Unused credits cannot be carried forward to future tax years

Importantly, the total national cap for the credit is $10 billion per year, and credits will be awarded on a first-come, first-served basis through an allocation system managed by the IRS.

The credit is available only to individuals who are U.S. citizens or residents, not to businesses or corporations. Under §25F the tax credit is effective for tax years after Dec. 31, 2026.

Eligibility requirements

Donations must be made to certified scholarship-granting organizations (SGO) to qualify for the credit, as defined by state law and approved by the IRS. To be a qualified SGO, the organization must:

• Be a 501(c)(3) tax-exempt entity
• Use at least 90% of contributions to award scholarships to eligible students
• Provide scholarships for K-12 education only
• Distribute funds equitably without favoring any specific schools or religious groups

Donors cannot designate their contributions for a specific student, and they cannot receive any benefit in return for their gift other than the tax credit.

Contribution limits

There are annual limits on the amount of credit a taxpayer can claim:

• Individuals may claim up to $1,700 per taxpayer ($3,400 MFJ) per year
• Federal credit is reduced by any state credit received for the same contribution
• Unused credits may be carried forward up to 5 years

Because the contribution generates a federal tax credit, it cannot be claimed as a charitable deduction on Schedule A, Form 1040. However, if only a portion of the gift is credited, the remaining amount may be deductible under standard charitable contribution rules, subject to adjusted gross income (AGI) limits. Remind your tax clients they cannot double dip.

Who benefits?

This new federal scholarship credit could appeal to a wide range of taxpayers, including:

• High-income individuals looking for ways to reduce federal tax liability while supporting school choice
• Taxpayers in states without generous education tax credits, who can now benefit at the federal level

It also creates opportunities for SGOs and private schools to raise scholarship funds more efficiently, particularly in communities where educational options are limited or underfunded.

State coordination and legal considerations

Taxpayers should know that this federal credit may interact with existing state-level education tax credits. For example, in states like Arizona or Georgia that already offer their own scholarship credits, donors will need to assess how contributions are treated for both state and federal purposes.

Additionally, since SGOs are governed by state law and must meet IRS requirements, tax professionals should verify the certification status of any organization receiving a donation. Improper contributions may not qualify for the credit.

Planning opportunities for tax professionals

For tax practitioners, the new credit opens the door to year-end planning strategies, especially for clients with philanthropic goals and significant tax liabilities. It’s a compelling alternative to traditional charitable giving, with more immediate and guaranteed federal tax savings.

However, timing is everything. Because of the national cap, clients interested in maximizing the credit must apply early in the year and stay current with IRS guidance on allocation and contribution deadlines.

Ready to fund a scholarship?

The OBBBA’s federal scholarship credit represents a significant shift in how charitable giving can intersect with tax planning. While still new and subject to IRS interpretation, the program offers both a financial incentive for donors and a lifeline for students seeking greater access to education.

As with any new credit, the fine print matters. Be sure to consult with a tax advisor to understand the eligibility rules, contribution procedures and strategic opportunities specific to your situation.