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By Stephanie Kazmer
Ever since the Federal Scholarship Tax Credit started getting attention, I have heard different versions of the same question from Pennsylvanians who are already familiar with our state education tax-credit programs: does this replace the EITC?
The short answer is a resounding NO!
In my role at FundEDU, I help Pennsylvania businesses and individuals understand the Educational Improvement Tax Credit program and how participation can support local K–12 schools and students. Some businesses participate directly. Other taxpayers participate through Special Purpose Entities (SPE), which allow tax credits to pass through to the SPE owners for eligible donations. However, the new FSTC program works differently, and Treasury’s recently released proposed regulations made that distinction much clearer.
For starters, unlike the EITC, which is a Pennsylvania specific program, the Federal Scholarship Tax Credit is an individual federal income-tax credit. Beginning on January 1st 2027, eligible individuals may claim a tax credit of up to $1,700 per individual, or $3,400 for couples filing jointly, for donations made directly to an eligible Scholarship Granting Organization (SGO). This is an important point, because PA taxpayers who have participated via businesses or SPEs for years, it is incredibly easy to hear “federal education tax credit” and assume the new program is just a national version of what they are already familiar with.
However, If a business owner wants to participate in the FSTC, the existing federal rules only consider a qualifying contribution made as an individual. Any donations made by a partnership, LLC, or S corporation can’t be considered as part of the owner’s FSTC contribution simply because he or she owns part of the business. That is why, when I explain these programs to potential donors, I lead with that distinction from the very beginning. After all, your business may have an EITC strategy, but you as an individual should begin to consider having a separate FSTC strategy.
This is especially important because the FSTC is not going to be replacing the EITC. A Pennsylvania business will still have plenty of good reasons to continue participating in EITC, and I am here to help with that! However, I also want to highlight that the same business owner will likely also have an individual federal opportunity in just a few months!
The nuance of how the two programs interact is also an important consideration for a business owner planning their donations in 2027. For example, in states that allow a tax credit for a donation that also qualifies for the FSTC, Treasury has indicated that claiming the state credit will reduce the amount that can be used to calculate the federal credit. While this is different from the way many Pennsylvania taxpayers participate in EITC through an SPE, it reinforces the larger point: education tax credits programs are not the same, just because they support schools, or because the acronyms sound similar. But that nuance is precisely where experts like us at FundEDU are important, because explaining the differences between programs has to involve a brief conversation about federal limits, state percentages, entity structures, SGOs, SPEs, and tax-return mechanics.
Ultimately, that is why my job is not to turn every donor into a tax-credit expert. Instead, what I try to do every day is make the opportunity understandable enough that a potential donor knows what they are participating in, and where they should go for tax advice specific to their situation. After all, the majority of taxpayers I speak with don’t really care about the mechanics of a tax credit. In my experience, taxpayers become donors when they understand that there may be a way to use their tax liability to support local students, schools, and communities they care about.
The quickly arriving start of the FSTC gives those taxpayers another opportunity, as opposed to erasing the one Pennsylvania already has. So, when I talk with a Pennsylvania business owner, I don’t tell them that the FSTC has arrived and the EITC conversation is over. Instead, I tell them they now have another opportunity to support education, locally and nationally. For taxpayers trying to make a smart decision with their money, I believe that is the best place to start.
