The IRS and Treasury Department issued Notice 2025-70 on November 25, requesting public comments on how to implement a new federal tax credit for donations to K-12 scholarship organizations. Starting January 1, 2027, individual taxpayers can claim up to $1,700 in tax credits for cash contributions to Scholarship Granting Organizations (SGOs) that help low- and middle-income families pay for elementary and secondary education expenses.
This credit was established under the One, Big, Beautiful Bill and represents a significant shift in federal K-12 education funding policy. Unlike a tax deduction that reduces taxable income, this is a dollar-for-dollar reduction in taxes owed. This means a $1,000 donation could reduce your tax bill by the full $1,000, up to the $1,700 annual limit.
The IRS is seeking public input on several implementation issues, including how states should certify eligible organizations, reporting requirements for SGOs, and procedures for organizations operating across multiple states. Comments are due by December 26, 2025.
For business owners and high earners looking to maximize tax-advantaged strategies, this new credit adds another tool to consider alongside traditional retirement account contributions and other tax planning approaches.
How the Credit Works
The new credit is nonrefundable, meaning it can reduce your tax liability to zero but won’t generate a refund if the credit exceeds what you owe. However, unused portions can be carried forward for up to five years, according to tax professionals analyzing the statute.
There’s an important limitation: you cannot claim both this SGO credit and a charitable deduction for the same contribution on your federal return. Additionally, if your state offers its own SGO tax credit, that amount reduces your federal credit dollar-for-dollar.
The credit applies only to cash contributions made to qualifying SGOs in participating states. This means your state must opt into the program and provide the IRS with a list of approved organizations for contributions to be eligible.
For married couples filing jointly, the statute suggests each spouse may be eligible for the $1,700 credit, potentially allowing up to $3,400 per household, though final IRS regulations will clarify this interpretation.
State Participation Required
A key requirement is state participation. Individual states and the District of Columbia must choose to participate by providing the IRS with lists of SGOs that meet federal requirements. Without state participation, contributions to local scholarship organizations won’t qualify for the federal credit.
States must also annually certify that their listed SGOs continue to meet statutory requirements. The IRS is specifically seeking comments on what policies and procedures states should implement to ensure accurate certification.
This creates a potential planning consideration for donors: monitoring which states participate and maintaining current lists of approved organizations will be essential for claiming the credit.
Source: IRS.gov
Impact on Scholarship Recipients
The legislation also creates a new tax benefit for scholarship recipients. Starting with scholarships received after December 31, 2026, K-12 scholarship funds distributed through qualifying SGOs will be excluded from federal income tax under new Section 139K.
This income exclusion covers elementary and secondary education expenses including tuition, fees, tutoring, books, and other K-12 educational costs. Previously, many K-12 scholarships could be subject to federal income tax depending on their structure and use.
Open Questions for Regulations
The IRS notice highlights several areas where future regulations will provide clarity. Key questions include how multi-state organizations should qualify, what reporting requirements SGOs must meet, and specific procedures for state oversight and certification.
Tax professionals note that organizations must be 501(c)(3) public charities to qualify as SGOs, not private foundations. They must also use contributions exclusively for scholarships and maintain separate, non-commingled accounts for scholarship funds.
The regulatory process will likely address practical implementation questions that affect both donors and organizations, making the public comment period an important step in shaping how the credit functions in practice.
Interested parties can submit comments through the Federal e-Rulemaking portal using reference “IRS-2025-0466” by December 26, 2025. The final regulations and state participation decisions will determine how effectively this new credit can be utilized starting in 2027.