Section 70411 of the One Big Beautiful Bill Act (OBBBA) establishes a new federal tax credit to encourage private funding of K–12 scholarships through Scholarship Granting Organizations (SGOs). It also provides a corresponding exclusion from gross income for scholarships received. The program is designed to expand educational access for lower-income students, but it requires voluntary state participation and takes effect for tax years beginning after December 31, 2026. Below is a summary of the key provisions.
New Federal Tax Credit for SGO Contributions (Section 25F):
- Eligibility: U.S. individuals may claim a credit for cash contributions to qualified SGOs in participating states.
- Credit Limit: Up to $1,700 per taxpayer per year (not per return (joint filers may each claim the credit).
- State Credit Offset: The federal credit is reduced by any state tax credit received for the same contribution.
- No Double Benefit: Contributions claimed for this credit cannot also be deducted under Section 170.
- Carryforward: Unused credit amounts may be carried forward for up to five years.
- Covered States: Only applies to contributions made in states that opt in and provide the IRS with a list of qualified SGOs.
Qualified Contributions & Students
- Qualified Contribution: A charitable cash gift to an SGO that awards scholarships to eligible students in the same state.
- Eligible students must:
- Have household income ≤ 300% of area median gross income (AMGI).
- Be eligible to enroll in a public K–12 school.
- Qualified Expenses: Defined under Section 530(b)(3)(A), including tuition, fees, books, supplies, equipment, tutoring, and special needs services.
Requirements for SGOs
- SGOs must:
- Be a 501(c)(3) public charity (not a private foundation).
- Maintain separate accounts for qualified contributions.
- Provide scholarships to 10+ students, not all attending the same school.
- Spend at least 90% of income on scholarships.
- Prioritize returning students and siblings of current recipients.
- Not earmark funds for specific students.
- Verify household income and family size.
- Avoid self-dealing (no scholarships to disqualified persons under Section 4946).
Exclusion from Gross Income for Scholarships (Section 139K):
- Tax-Free Scholarships: Starting for amounts received after December 31, 2026, scholarships for qualified elementary or secondary education expenses provided by SGOs to eligible students (or their dependents) will not be included in gross income for federal tax purposes. This means the scholarship money received by the family is tax-free.
- Definitions: The terms “qualified elementary or secondary education expense,” “eligible student,” and “scholarship granting organization” used in this section have the same meaning as defined in Section 25F.
Effective Date:
- The tax credit for SGO contributions (Section 25F) generally applies to taxable years ending after December 31, 2026.
- The exclusion of scholarships from gross income (Section 139K) applies to amounts received after December 31, 2026.
In summary, this new legislation creates a powerful incentive for individuals to donate to SGOs, with direct tax credits for donors and tax-free treatment for recipients. This aims to increase private funding for K-12 scholarships, particularly for lower-income students, while also making the scholarships tax-free for recipient families. However, the program’s implementation depends on states voluntarily opting in and listing qualified SGOs within their borders.
Lastly, it is essential to emphasize that the provisions outlined in Section 70411 of the OBBBA will not take effect until tax years beginning after December 31, 2026. This means that taxpayers cannot claim the new federal tax credit or benefit from the scholarship income exclusion until the 2027 tax year at the earliest. Additionally, the IRS is expected to issue further regulations and guidance to clarify implementation details, including how states can opt in and how SGOs must report compliance.
If you would like further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
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