Inside the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, is a brand-new federal tax credit that most people haven’t heard about yet — and it could put up to $1,700 back in your pocket from 2027 simply for donating to certain school scholarship funds.

The catch? The rules aren’t fully written. In late November 2025, the IRS released Notice 2025-70, signaling how it plans to run the program and asking the public for feedback before it locks in the final regulations. Here’s a plain-English breakdown of what we know so far, who it affects, and why it matters.

The Big Idea in One Sentence

If you donate cash to a qualifying scholarship organization in a participating state, you may be able to claim a dollar-for-dollar federal tax credit of up to $1,700 — not just a deduction, but an actual credit that directly reduces your tax bill. This is the new Section 25F credit, created by Section 70411 of the OBBBA.

How the Credit Works

A credit is more valuable than a deduction. A deduction reduces the income you’re taxed on; a credit reduces your tax bill directly. So a $1,700 credit is worth a full $1,700 off what you owe.

A few important ground rules:

  • It’s nonrefundable. It can lower your tax to zero, but it won’t generate a refund beyond that.
  • It’s for individuals who are U.S. citizens or residents.
  • The donation must be cash given to a qualified Scholarship Granting Organization (SGO).
  • The money must stay in-state. The contribution has to fund scholarships for students only within the state where the organization is officially listed.
  • The state has to opt in. Your governor (or a designated state entity) must voluntarily elect to participate and certify which organizations qualify.

Three Limits to Keep in Mind

  1. The $1,700 cap. That’s the most any single taxpayer can claim in a year.
  2. The state-credit offset. If your state also gives you a tax credit for the same donation, your federal credit gets reduced by that state amount. You can’t double-dip across both governments for the same dollar.
  3. No Double-Dipping with Charitable Deductions. This is a point worth flagging for clients: you cannot claim both the Section 25F credit and a charitable deduction under Section 170 for the same contribution. If you take the credit, that donation is off the table as an itemized charitable write-off. For most people the credit will be the better deal, but it’s a planning decision worth running the numbers on.

What If Your Credit Is Bigger Than Your Tax Bill?

If your allowable credit exceeds what you can use this year, the unused portion carries forward to future years — but with two guardrails:

  • It can only be carried forward for up to five years.
  • Credits are used on a first-in, first-out basis, so the oldest carried-forward credit gets applied first.

 

 

Who Counts as a “Scholarship Granting Organization”?

Not every charity qualifies. To be an SGO, an organization must:

  • Be a 501(c)(3) public charity (private foundations are excluded).
  • Keep qualified contributions in separate, dedicated accounts — no co-mingling with other funds.
  • Be officially listed by a participating state for that year.

It also has to follow strict operational rules:

  • Award scholarships to at least 10 students, and not all at the same school.
  • Spend at least 90% of its income on scholarships for eligible students.
  • Use scholarships only for qualified K–12 education expenses.
  • Prioritize returning students first, then siblings of prior recipients.
  • Never earmark a donation for a specific student.
  • Verify household income and family size to confirm students meet the income limit.
  • Never award a scholarship to a disqualified person (think insiders and their close family).

Who Qualifies as a Student?

Scholarships are aimed at families of modest and middle income. An eligible student’s household income generally cannot exceed 300% of the area median gross income for where they live. SGOs will be responsible for verifying this — likely by reviewing tax returns such as Form 1040.

 

 

Timeline & What to Watch

Here’s where this stands and the key dates to keep on your radar:

  • Effective for the 2027 tax year. By statute, Section 25F applies to taxable years ending after December 31, 2026. That means qualifying contributions made after December 31, 2026 are eligible, and the credit you generate in 2027 gets claimed on your 2027 return (filed in 2028).
  • States can opt in now. Governors (or a designated state official) can already make an advance election to participate for 2027 using IRS Form 15714. Participating states must certify their list of approved SGOs to the Treasury by January 1 of each year, starting January 1, 2027.
  • Final regulations are still pending. Notice 2025-70 only announced the IRS’s intent to issue proposed regulations and gathered public comments (the comment window has now closed). The normal path — proposed rules, then a comment period, then final rules — is still ahead, and no firm finalization date has been set.
  • The credit goes live whether or not the rules are final. This is the wrinkle worth watching: the effective date is fixed by law, but the IRS guidance is on a separate track. Expect the IRS to prioritize the most time-sensitive pieces first — the state election and SGO-listing mechanics — since states face that January 1, 2027 certification deadline.

The Bottom Line

Section 25F is a genuinely new way for individuals to support school choice while getting a meaningful federal tax benefit — but it only works in states that opt in, and the fine print is still being drafted. If you’re a donor, watch whether your state participates. If you run or advise a nonprofit that might qualify as an SGO, now is the time to understand the operational and recordkeeping requirements coming down the pipeline.

We’ll be tracking the proposed regulations closely (as of earlier this month – IR-2026-76 – there were 27 States that signed up for this program). If you’d like to talk through whether this credit fits into your tax planning, reach out — this is exactly the kind of new provision that rewards getting ahead of it.

 

 

The Open Questions the IRS Still Needs to Answer at this Point

This is where Notice 2025-70 gets interesting for those of us in the profession. The IRS hasn’t finalized the rules — it’s asking for input on several genuinely tricky issues:

What does “located in the state” mean? Does an organization need a physical presence, or is being authorized to operate there enough?

How will states verify SGOs? The IRS has made clear that letting organizations simply self-certify won’t be enough. States will need real verification procedures, and the certification will be made under penalty of perjury.

How do we define “income” for the 90% test? The IRS is leaning toward counting all income — including unrelated business income — not just the donations sitting in segregated accounts. That’s a meaningful distinction for how these organizations budget.

How do multistate organizations handle the “in-state only” rule? Big national SGOs may have to ask donors to designate which state their gift supports, and the IRS is wrestling with how to apply the 10-student and 90% rules across multiple states.

Who’s a “disqualified person”? The IRS is considering defining a “substantial contributor” as anyone giving more than 2% of the organization’s total lifetime contributions, and treating scholarship selection committee members and their immediate families as disqualified.

What will reporting look like? Expect SGOs to file a new annual IRS form, report donor tax ID numbers, and provide details on each scholarship recipient — even organizations that don’t normally file an annual return.