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On November 26th, the IRS issued Notice 2025-70, requesting comments on a significant new tax benefit that will affect many of your clients starting in 2027. Section 25F of the Internal Revenue Code, enacted as part of the One, Big, Beautiful Bill Act (OBBBA), creates a federal tax credit for individuals who contribute to Scholarship Granting Organizations (SGOs). But what is Section 25F and who does it affect?
Section 25F creates a tax incentive for private funding of K-12 scholarships serving “elementary and secondary school students from low- and middle-income families.”
Beginning January 1, 2027, U.S. citizens and residents can claim a nonrefundable federal tax credit of up to $1,700 for cash contributions to qualifying SGOs. This credit directly reduces tax liability but can only reduce it to zero. If the credit exceeds a taxpayer’s liability, the unused portion can be carried forward for up to five taxable years on a first-in, first-out basis.
SGOs must be 501(c)(3) organizations serving students from households earning no more than 300% of the area median gross income who are eligible to enroll in public elementary or secondary schools.
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This credit will not be automatically available nationwide. States must voluntarily elect to participate and submit annual lists of approved SGOs to the IRS by January 1 each year. The election must be made by the Governor or another designated state authority. Clients will only be able to claim the credit for contributions to organizations on their state’s certified list.
There are currently no states participating in the program. States may begin submitting elections as early as 2026.
Section 25F(b)(2) requires that “the amount allowed as a credit under subsection (a) for a taxable year shall be reduced by the amount allowed as a credit on any state tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year.”
This means if your client claims a state tax credit for SGO contributions, the federal credit decreases by that same amount. For example, if a client contributes $1,700 to an SGO and claims a $500 state tax credit for that contribution, the federal credit would be reduced to $1,200. If the state credit equals or exceeds $1,700, there would be no federal credit available.
Section 25F prohibits double benefits. Any contribution claimed for this credit cannot also be taken as a charitable deduction under Section 170. Contributions up to $1,700 (or the remaining amount after state credit offsets) generate the federal credit but no charitable deduction.
It’s important to remember that not every education-focused charity qualifies as an SGO. Organizations must be 501(c)(3) entities that meet specific requirements, including:
The IRS has indicated that if an organization later loses its qualified status, donors will generally remain protected—unless they knew about or were responsible for the disqualifying activities. This makes advising clients on keeping proper documentation at the time of contribution especially important for risk management.
Some SGOs operate across multiple states. Donors contributing to these multistate organizations must designate which participating state’s list includes the organization and where their contribution will be used. Ensure clients making contributions to national or regional SGOs clearly specify this state designation.
While January 1, 2027, is a while off, it’s never too late for client financial planning. Identify clients who make regular charitable contributions and help them understand this benefit before 2027. The credit’s nonrefundable nature requires careful analysis of each client’s tax situation—clients need sufficient tax liability to benefit from the credit in the year claimed. The five-year carryforward provision provides flexibility for clients whose tax liability fluctuates, making this particularly relevant for year-end tax planning conversations.
Remember, the benefits of this new tax credit will only be available in states that elect to participate. Be sure to stay up to date on which states opt in!
The IRS is accepting comments on implementation details until December 26, 2025. This is your opportunity to influence the regulations that will govern your practice. The IRS is looking for comments for reporting requirements, substantiation standards, and multistate organization rules.
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