Federal Scholarship Tax Credit: rules for donors and tax advisers

Why the IRS uses this name

One program in this space carries four different names, and which one you meet depends on who is doing the writing. “Federal Scholarship Tax Credit” is the descriptive label the IRS adopted for its own guidance and program materials. It is plain and functional: a federal credit, for scholarships.

The enacted credit is found in §25F. The provision was enacted as part of the One Big Beautiful Bill Act (P.L. 119-21) at §70411, which added §25F to the Internal Revenue Code, and earlier scholarship-credit proposals included the Educational Choice for Children Act. Advocacy organizations, meanwhile, market it as the Education Freedom Tax Credit.

The October 1, 2026 regulations carry the IRS name. Both the proposed regulations and the temporary regulations are titled “Federal Scholarship Tax Credit,” and the form donors will use to claim it is Form 8525, Federal Scholarship Tax Credit. Treasury’s press release used both labels, calling it “the new Federal Scholarship Tax Credit under section 25F, commonly known as the Education Freedom Tax Credit.”

How it behaves as a tax item

The FSTC is an individual income-tax credit, not a business credit and not a deduction. Six characteristics determine most of its planning consequences:

• Non-refundable. It offsets liability down to zero and no further. A taxpayer with no federal income-tax liability gets nothing from it in that year. Under Treasury’s proposed regulations the limit is the §26(a) liability after the nonrefundable personal credits under §§21, 22, 24, 25, 25A, 25B, 25C and 25E.
• Allowed against the AMT. The proposed regulations allow the credit against the tax imposed by both §1 and §55(a).
• Five-year carryforward. Credit in excess of current liability is not lost; it carries forward for up to five years. The proposed regulations apply it first in, first out, with carryforwards used before the current year’s credit. Only unused credit carries forward; contributions above the cap do not.
• Cash only. Contributions of appreciated securities or other property do not qualify for this credit, which is a meaningful difference from ordinary charitable planning. The temporary regulations define cash as currency, check, money order, electronic transfer (including credit or debit card), after-tax payroll deduction or a similar method, in U.S. dollars, and exclude digital assets.
• No double benefit. A gift that generates the §25F credit cannot also be claimed as a §170 charitable deduction, including credit carried forward. Under the proposed regulations, the portion of a designated gift that produces no credit may still be deductible under the normal §170 rules.
• State credits come off first. §25F(b)(2) reduces the credit by any state credit for the same gift, and the proposed regulations apply that reduction before the $1,700 cap: a $2,500 gift with a $500 state credit still supports the full $1,700. If a state credit covers both designated and undesignated dollars, it is applied to the undesignated dollars first. The ordering rule, explained.

The cap is $1,700 per taxpayer. Under Treasury’s proposed regulations, released October 1, 2026, spouses filing jointly are treated as separate taxpayers for that cap, so a joint return can claim up to $3,400 when each spouse gives. Treasury’s example has each spouse give and designate $2,000. The proposal does not say how one gift from a joint account is divided between spouses, so ask a tax professional about documenting separate gifts by each spouse. The rule is proposed, not final, but Treasury says taxpayers may rely on it for contributions made on or after January 1, 2027. Worked examples and the full donor mechanics are here.

Who can claim it

Individual taxpayers who make a qualifying cash contribution and who owe federal income tax. Because it is a credit rather than a deduction, it reaches filers who take the standard deduction, which is the large majority. The credit is federal, so a taxpayer’s ability to claim it does not turn on whether their state has opted into the program.

Treasury’s proposed regulations fill in the details. The claimant must be a U.S. citizen or resident (under §7701(b) or a §6013(g) or (h) election), and a part-year resident counts only the contributions made while a citizen or resident. The gift has to come from the individual: a partner’s distributive share, or an S corporation shareholder’s pro rata share, of the entity’s gift is not a qualified contribution, even when it is deductible. A donor may give to an SGO on any participating state’s list, regardless of where the donor lives, and may generally rely on the organization’s presence on the IRS SGO list at the time of the gift.

What state participation governs is the supply side: whether scholarship granting organizations in that state appear on the federal list, and therefore whether students who live there can receive scholarships funded by these contributions. States elect one calendar year at a time; under the temporary regulations a state wanting in for 2027 must file an advance election by January 1, 2027 and submit its SGO list by February 15, 2027. IRS state-participation roster.

What counts as a qualifying donation

The contribution must be cash, given to a qualifying scholarship granting organization (SGO) that appears on its state’s submitted list, and the donor must designate it to the organization as a §25F qualified contribution at the time of the gift. Under the temporary regulations that designation is irrevocable, it may cover only part of a gift, and the value of any goods or services received is subtracted. Those organizations operate under specific federal constraints: they must spend at least 90% of their income on scholarships for eligible students by the end of the following year, and recipient households must generally be at or below 300% of area median gross income. Under the proposed regulations, a single-state SGO generally tests all gross receipts. If at least 85% of its activities are scholarship granting, it may use the operational safe harbor and apply the test to qualified contributions and earnings in its §25F account instead. A multistate SGO must meet the 85% scholarship-activity requirement, maintain a separate §25F account for each covered state, and satisfy the operational requirements separately for each account.

Substantiation runs through the organization. Under the temporary regulations Treasury issued October 1, 2026, the scholarship organization gives each donor a unique donor number on a written acknowledgment by January 31 (along with its EIN, the donor’s designated total, and any goods or services provided), reports the donor’s name, address and total to the IRS by February 28, and the donor carries the number onto Form 8525, which lets the agency match a claimed credit to a real donor and a real organization. Donors do not give the organization a Social Security number. Under the proposed regulations, a return that omits an SGO’s donor number is presumed to reflect no qualified contribution to that SGO, a presumption the acknowledgment can rebut. The IRS has not yet released Form 8525 or its instructions.

Notes for tax professionals

• The 2026-to-2027 boundary matters. A December 2026 gift earns no credit; the same gift in January 2027 does. Clients planning year-end giving should know the difference. The transition-year planning guide.
• Withholding may affect timing. A tax adviser can review ordinary Form W-4 rules against expected liability and actual qualifying gifts. The October regulations do not address withholding; an adjustment does not guarantee credit eligibility or a refund.
• Joint filers: $3,400 under the proposed rules. Each spouse’s own gift supports up to $1,700. The rule is proposed, with reliance allowed for 2027 contributions. Have each spouse make and designate a separate gift; the proposal is silent on splitting a single joint-account gift.
• State-credit clients. The state credit reduces qualified contributions before the cap, and a partly designated gift absorbs the state credit in its undesignated dollars first (Treasury’s example: $4,000 given, $1,700 designated, $400 state credit, full $1,700 federal credit). State credit carryforwards and carrybacks count in the year of the gift.
• Pass-through gifts don’t count. Clients who give through a partnership or S corporation should give individually instead if they want the credit.
• Not addressed. The rules say nothing about gifts through donor-advised funds, IRA qualified charitable distributions, employer matches, or trusts and estates. Do not assume they qualify.
• Guidance is partly binding, partly proposed. Treasury released proposed and temporary regulations on October 1, 2026. The temporary regulations (definitions, SGO registration, acknowledgments, IRS reporting, state procedures) take effect December 1, 2026, have September 1 applicability provisions, and expire October 1, 2029. The proposed regulations take comments until December 1, 2026, with a public hearing December 15, 2026, and the final rules can still move. Still to come: Form 8525, the IRS SGO portal, and Treasury’s separate §530 guidance on qualified expenses and schools. Consult the primary regulations for the full technical requirements.

Frequently asked questions

Sources and guidance

Sources checked October 19, 2026. Proposed rules and projections are identified in the article. Consult the latest official guidance before acting.

• §25F
• Proposed regulations
• Temporary regulations
• Press release
• The ordering rule, explained
• Proposed regulations, released October 1, 2026
• Form 8525
• Supporting source