The Federal Scholarship Tax Credit (FSTC) is a new federal tax credit for gifts to scholarship granting organizations (SGOs), the nonprofits that award the scholarships.
On Oct. 1, 2026, the U.S. Treasury Department and the Internal Revenue Service (IRS) made public two documents, both titled “Federal Scholarship Tax Credit,” for official publication Oct. 2: a set of temporary rules and a set of proposed rules. The temporary rules cover how states sign up and list SGOs, and how SGOs register and report. The proposed rules cover the whole program. Donors, SGOs and states may rely on the proposed rules for gifts made from Jan. 1, 2027, in tax years that end before Treasury publishes the regulations in final form, as long as each one follows the parts that apply to it in full and consistently.
The headline for public schools: under the proposed rules, an SGO paying for individual academic tutoring or special needs services could count students as meeting the income limit, without checking household income, if the school picks them by need. The school must be in a qualified census tract (a federally designated low-income area) or certify that at least 80 percent of its students live in one.
Here are the questions we asked before the documents came out, with the answers.
What the law already says
These come from the law and the IRS, not the new documents.
From Jan. 1, 2027, an individual can claim a federal tax credit of up to $1,700 a year for a cash gift to an SGO in a participating state. (IRS program page) An eligible student is one who is eligible to enroll in a public elementary or secondary school and lives in a household with income at or below 300 percent of the area median gross income. (the law)
Scholarships cover costs the tax law already allows for education savings accounts: costs tied to a public, private or religious school, such as academic tutoring and special needs services. Extended-day programs and transportation count only if the school requires or provides them. (the expense list)
Gifts add to scholarship money for eligible students in the community, not for any particular student.
What the documents say, question by question
Each answer has a status. Settled means it rests on the temporary rules or the law itself. Proposed means it rests on the proposed rules: you may rely on it for gifts made from Jan. 1, 2027, but it may change after public comment. Still open means the documents do not answer it. Deferred to later guidance means Treasury says separate guidance will answer it.
Question 1: Which services count, and when?
Status: Deferred to later guidance
The documents do not yet say which services count. Treasury calls separate guidance on allowed expenses a high priority, which it intends to issue as soon as possible. No date is given.
Until then, the proposed rules point to the law’s expense list and any guidance under it. They do not define “required or provided by” the school, or name after-school, summer, transportation or technology services.
A few related points are already in the documents. Under the temporary rules, a state may not limit which expenses scholarships cover (see Question 3). In its economic analysis of the proposed rules, Treasury’s own example of a specialized SGO is one that offers academic tutoring to qualifying public school students. In its explanation of the proposed rules, Treasury says a student need not be enrolled to apply: one who can enroll in a public school may get a scholarship the summer before school starts. It also says an SGO may fund only expenses reasonably necessary to its charitable purpose.
Question 2: How can districts and education foundations take part?
Status: Still open
The documents do not name school districts, district-affiliated foundations or education foundations, so how they take part is not directly addressed. Every SGO on a state’s list must:
- Be a tax-exempt public charity, not a private foundation.
- Be located in the state: allowed to do business there and following its charity rules.
- Register in the IRS online SGO portal.
- Keep these gifts in a separate account.
- Serve 10 or more students who do not all attend the same school.
- Spend at least 90 percent of its income on scholarships.
- Get a yearly financial and program audit (proposed).
The proposed simpler income check in the headline would apply only when the school picks the students by need, and it would need a yearly third-party audit (details under “What this means for your district” below). The proposed rules would also adjust the 300 percent income limit for family size, and would count children in foster care as meeting it whether or not their household income is checked. In their economic analysis of the proposed rules, Treasury and the IRS estimate that with these income rules, 96 percent of children in states that have elected to take part will be eligible for these scholarships.
Question 3: What can a state add?
Status: Settled
The temporary rules apply from Sept. 1, 2026. A state may not require SGOs to operate under stricter rules than the federal operating requirements in the law, such as by limiting which schools scholarship students attend or which expenses scholarships cover.
A state must require SGOs to follow its general charity rules. It must also set application, paperwork and financial reporting rules. Those rules must be reasonably tied to what the state needs to approve each SGO and to prevent and catch fraud, such as two awards to one student for the same expense.
State procedures are subject to federal review. A state must remove an SGO that asks to come off its list. Otherwise, it may remove one only through a fair process that gives the SGO due process.
Question 4: When are state SGO lists due for 2027?
Status: Settled
For 2027, a state signs up by filing an advance election on IRS Form 15714 by Jan. 1, 2027. It may then send its SGO list by Feb. 15, 2027. After that, it cannot add to its 2027 list unless later guidance allows it; additions go on the next year’s list.
States register and file through a new IRS online portal. For the first year, the IRS is considering other temporary steps, to come in future guidance.
A state that files an advance election but misses the list deadline has no SGOs that year. The IRS will post on irs.gov which states have filed an advance election.
Question 5: Charter schools
Status: Still open
The documents do not discuss charter schools or a nonprofit tied to one school. They keep the rule that an SGO must serve 10 or more students who do not all attend the same school. The proposed rules define a school as one providing kindergarten through grade 12 education, as state law decides. How that fits a charter-affiliated nonprofit serving one school is not addressed.
Question 6: What do the documents say for donors?
Status: Settled for the $1,700 cap and the state-credit reduction; Proposed for joint filers and how the reduction is applied
Up to $1,700 per taxpayer. Under the proposed regulations, spouses filing jointly are treated as separate taxpayers, so a couple can claim up to $3,400 if each spouse gives at least $1,700. The $1,700 cap comes from the law; treating spouses separately is proposed.
The law also reduces the federal credit by any state tax credit allowed for the donor’s qualifying gifts that year. Under the proposed rules, the state credit is subtracted from the donor’s qualifying gifts first, and the $1,700 cap applies to what is left. Only state credits for those same gifts count. If only part of a gift that earns a state credit is designated for this program, the state credit comes first out of the part that is not designated.
The law bars a charitable deduction for any part of a gift that earns this credit. Under the proposed rules, that includes credit carried forward to a later year, and any part of the gift that does not earn the credit may still be deductible as a charitable contribution if it meets the usual federal rules for charitable deductions. In Treasury’s example, a $2,000 gift earns a $1,700 credit, and the other $300 may be deductible on those terms.
What is still open
Expense rules wait on Treasury’s separate guidance, including when after-school, summer and transportation services count as required or provided by the school. District-affiliated and education foundations, and charter-affiliated nonprofits, are not named.
Anything marked Proposed, or based on the proposed rules, can still change after public comment. Treasury wants comments on every part, including whether to add more safe harbors (simple approved ways) to check that scholarships go to allowed expenses.
How to comment
Comments go to the proposed rules, REG-117199-25; the temporary rules send readers there too. Comments must be received within 60 days after the proposed rules are published on Oct. 2, 2026.
Treasury strongly encourages filing online at regulations.gov, indicating IRS and REG-117199-25. Paper comments go to CC:PA:01:PR (REG-117199-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Filed comments cannot be edited or withdrawn, and will be made public.
The public hearing is Tuesday, Dec. 15, 2026, at 10 a.m. Eastern Time, at the IRS building, 1111 Constitution Avenue NW, Washington, D.C., or by phone. Requests to speak, with an outline of topics, are due by the 60-day deadline. If no outlines arrive, the hearing is cancelled. To attend, email publichearings@irs.gov by 5 p.m. Eastern Time on Thursday, Dec. 10, 2026.
If your district or education foundation wants a say in how services such as tutoring are treated, this is the window.
If your state has not yet made its election
Taking part is a state decision, made by the governor or whoever state law names. (the law) The IRS lists participating states on its Federal Scholarship Tax Credit page.
Residents of a state that has not elected can still claim the credit by giving to an SGO in a participating state, but those scholarships serve students in that other state. The law limits them to eligible students in the state where the SGO is listed, which the proposed rules read as the state where the student lives. So, apart from two exceptions, no scholarship from this program reaches students who live in a state until it elects, even if they attend school in a state that has.
The two exceptions: a dependent of a member of the Armed Forces can be served in the student’s home state and in the state where the service member lives. A dependent of someone living on Indian Lands can be served in the state where the student lives and in the state where the student attends school.
Each election covers one calendar year. The 2027 deadlines are in Question 4. For later years, a state may file an advance election between Jan. 2 and Sept. 30 of the year before, then send its list between Oct. 1 and Jan. 1. A state making its first election after 2027 follows future guidance.
What this means for your district before 2027
The documents put their requirements on states, SGOs and donors, not on school districts. Two parts of the proposed rules matter for planning.
First, the simpler income check. The school must pick each student by that student’s own academic or other need, and be in a qualified census tract or certify that at least 80 percent of its students live in one. The SGO’s yearly third-party audit must confirm, among other things, that providers were qualified, that each student’s need was diagnosed by a professional with no tie to the provider, and that the services met appropriate quality standards.
Second, the comment period and the Dec. 15 hearing are the formal way to weigh in before Treasury adopts the proposed rules.
Three steps make sense now:
- List the tutoring, special needs, after-school, summer, transportation and technology services your families pay for now, or would if cost were not the barrier, and compare it with what the documents say about expenses.
- Find out which SGOs will serve your state: scholarships flow through SGOs on a state’s list, not directly to schools.
- If the comment period is open, decide whether your district will file.
Where to read the documents
- The proposed rules, open for public comment, REG-117199-25, Federal Register document 2026-20277, Oct. 2, 2026
- The temporary rules, Treasury Decision 10057, Federal Register document 2026-20264, Oct. 2, 2026
The IRS posts program updates on its Federal Scholarship Tax Credit page.
Nothing here is legal or tax advice. The documents, and any later guidance, control.
FundEDU helps schools make sense of scholarship tax credit programs. Talk with our team about what the Federal Scholarship Tax Credit could mean for your students.
