On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) introduced a landmark change in education funding: the federal Scholarship-Granting Organization (SGO) tax credit. Starting with the 2027 tax season (for tax years ending after December 31, 2026), individuals can lower their federal tax bill while supporting access to private K-12 education.
How the Credit Works
The program allows individual taxpayers to claim a dollar-for-dollar federal tax credit of up to $1,700 per year for contributions to approved SGOs.
Example: If you owe $2,000 in federal taxes and donate $1,700 to an SGO, you’ll only owe $300. There’s no national cap on the total credits available—every eligible taxpayer may participate.
What Are SGOs?
Scholarship-Granting Organizations are nonprofits that award scholarships to students for tuition and other qualified K-12 education expenses. To qualify for the credit, an SGO must:
- Be a 501(c)(3) public charity (not a private foundation).
- Spend at least 90% of its income on scholarships.
- Serve at least 10 students across multiple schools.
- Avoid giving scholarships to donors, staff, or their families.
- Verify eligibility and prioritize renewals and siblings of prior recipients.
Scholarships may be used for tuition, books, supplies, transportation, and even room and board. Importantly, these scholarships are not considered taxable income.
Who Can Receive Scholarships?
Students are eligible if they:
- Live in households earning no more than 300% of area median income, and
- Are eligible to enroll in a public school in their state.
This structure ensures the program primarily benefits middle- and lower-income families.
State Participation Is Key
States must “opt in” by approving SGOs and submitting them to the Treasury. If your state doesn’t participate, students there cannot receive scholarships from local SGOs. However, donors in any state may still contribute to SGOs in participating states and claim the federal credit.
Combining Federal and State Benefits
If your state also offers a tax credit for the same donation, your federal credit will be reduced. However, some states may also allow a deduction, which means in certain cases you could receive a combined tax benefit greater than your original contribution.
Bottom Line
The federal SGO tax credit is a powerful new tool for families and donors. If you want to lower your taxes while helping students afford private education, this program is worth exploring as it takes effect in 2027. If you want to know more about the credit, contact your Rudler, PSC advisor.
Important: These are all new changes, and further guidance from the IRS and Treasury Department is expected. The details may change as new regulations and clarifications are issued. Be sure to consult with your tax advisor to understand how these changes affect your specific situation.
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