State election and the federal scholarship tax credit

Under the One Big Beautiful Bill Act, Congress created a new nonrefundable federal income tax credit of up to $1,700 for cash contributions to qualifying scholarship-granting organizations (SGOs) beginning Jan. 1, 2027. State election plays a key role in how the new federal tax credit for individual contributions to scholarship-granting organizations will work. The credit does not apply automatically in every state. Instead, it is available only if a state or the District of Columbia chooses to participate.

How state participation affects eligibility

IRS guidance states that only contributions made to SGOs listed by a participating state qualify for the credit. A participating jurisdiction is referred to as a covered state. To become a covered state, the state must elect to participate and submit a list of qualifying SGOs to the IRS. These organizations must provide scholarships to elementary and secondary students from low and middle-income families. If a state does not make this election, taxpayers generally cannot claim the credit for contributions connected to organizations in that state, even if those organizations otherwise operate as scholarship providers.

Advance election option

To give states time to evaluate the program and develop administrative processes, the IRS issued Revenue Procedure 2026-6. This guidance allows states to make an advance election to participate in the program before the first year the credit becomes available. Beginning Jan. 1, 2026, states may file Form 15714, Advance Election to Participate Under Section 25F for 2027, to notify the IRS of their intent to participate for the 2027 tax year. This advance election does not eliminate the requirement to later submit a list of qualifying SGOs, but it allows states to signal participation while continuing to finalize program details.

What this means for taxpayers

For taxpayers, the state election requirement is critical. The $1700 credit provides a dollar-for-dollar reduction of federal income tax liability rather than a charitable deduction that reduces taxable income. Additionally, the credit is per taxpayer, so a married couple filing jointly can each have a credit of up to $1700. Any unused credit can be carried forward for up to five years. The credit is available only if the contribution is made to an SGO that appears on a list submitted by a covered state. Taxpayers should not assume that contributions to any scholarship organization will qualify. Verification of both state participation and organizational eligibility will be necessary and any federal credit will be offset by any state credit received.

Considerations for tax professionals

Tax professionals should be prepared to explain how this federal credit depends on state level action. Clients may assume a federal credit applies nationwide, but that is not the case here. Once the credit becomes effective, attention to documentation and eligibility requirements will be important to ensure accurate reporting and compliance.

State responsibilities and administration

States that elect to participate will take on administrative responsibilities, including identifying qualifying SGOs and submitting required information to the IRS. The advance election option may help states avoid last-minute implementation challenges by allowing additional time for coordination and planning. The IRS has indicated that further guidance will be issued to address operational details such as maintaining and updating SGO lists.

Looking ahead

State election is a foundational element of the federal scholarship tax credit program. Whether a state chooses to participate will directly affect taxpayer eligibility and planning opportunities beginning in 2027. As additional IRS guidance is released, NATP will keep members informed about federal updates to the program.