Treasury and the IRS have released the rules for the Federal Scholarship Tax Credit (FSTC), in two documents.
Your donors’ gifts will go through an SGO, a scholarship granting organization: the nonprofit that collects the gifts and awards scholarships. For a private, independent, parochial or diocesan school, the first question is which SGO, and whether it will qualify for 2027. Whatever the SGO, your State cannot limit which schools scholarship students attend.
The temporary rules cover how SGOs register and report, and how States sign up and list them. They apply back to Sept. 1, 2026, and expire no later than Oct. 1, 2029. The proposed rules include the same text, which could still change after comments.
The proposed rules cover the whole program and could change after public comment. Donors, SGOs and States can count on them for gifts made starting Jan. 1, 2027, in tax years that end before final rules come out. To do so, they must follow them in full, every time.
Is our current scholarship partner automatically an SGO?
Where this stands: already set.
No. Being in a State tax credit scholarship program is not enough. An organization must meet the federal requirements on its own and be on its State’s SGO list. A gift to an organization not on the list earns no credit.
The organization has to ask to be listed. It must keep a separate account holding only these gifts and their earnings. An organization that has not yet reported to the IRS can still be listed.
Its written policies must expressly require it to follow the federal operating rules. A general promise to obey the law is not enough. Your State must also find it able and willing to comply.
How much must an SGO spend on scholarships?
Where this stands: the 90 percent figure is law. How it is measured is proposed and could change.
An SGO must spend at least 90 percent of its income on scholarships. An SGO that mostly awards scholarships has the easier test: only its FSTC account is checked.
The easier test applies to an SGO listed in only one State when at least 85 percent of its work is awarding scholarships, counting scholarships from any program. Below 85 percent, the test covers all of the organization’s income. An SGO listed in more than one State must reach 85 percent and keep a separate account for each State, or it does not qualify.
Ask your SGO how much of its work is scholarships.
Will an SGO need an audit?
Where this stands: proposed, so it could change after comments.
Yes. Every SGO would need an independent financial and program audit each year, shared with each State that lists it. An SGO taking in more than $500,000 would use an outside professional or accredited firm.
A smaller one could use a committee of independent people unrelated to its management. Committee members would sign the report under oath.
Treasury estimates these audits at $10,000 to $30,000 a year per SGO. That is one reason most schools do better partnering with an established SGO than building their own.
When does an SGO need to be registered and listed for 2027?
Where this stands: the deadlines are already set. The protection for donors who rely on the IRS list is proposed.
An organization seeking these gifts must register in the IRS SGO portal as soon as possible. Until then, it cannot send donors the written acknowledgment they need for the credit.
For 2027, a State must sign up to take part by Jan. 1, 2027. It may send its SGO list on or before Feb. 15, 2027. Later additions generally wait for the next year’s list. If a State signs up but misses the list deadline, no organization in that State qualifies as an SGO for that year.
The IRS FSTC page shows which States are taking part.
Tell donors to check the public IRS SGO list when they give. A donor who gives to an SGO the list shows as active on the day of the gift is generally protected. A donor loses that protection if they knew the SGO did not qualify, or if they caused or knew about the problem that later got the SGO removed from the list. An SGO appears on that list only if it agrees to.
Which students can an SGO’s scholarships serve?
Where this stands: proposed, so it could change after comments.
A scholarship can go only to a student who lives in the SGO’s State. Attending a school there is not enough. Military families and families living on Tribal lands are exceptions.
The law limits scholarships to students in households at or below 300 percent of the area median gross income. The proposed rules adjust that limit for family size and count children in foster care as meeting it. Treasury estimates that about 96 percent of children in participating States would be eligible.
What do our donors need to know?
Where this stands: mostly already set. Couples, business gifts, the new IRS form and how State credits are applied are proposed.
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 gift must be cash in U.S. dollars, including a check or card payment, and never a digital asset. The value of anything the donor gets back, such as a dinner, does not count. Partners and S corporation shareholders cannot count a share of a business’s gift.
A State tax credit for the same gift reduces the federal credit, and it comes off before the $1,700 cap. A $2,000 gift with a $400 State credit leaves a $1,600 federal credit.
When giving, a donor designates (marks) all or part of the gift for the federal credit. A State credit applies first to the part not designated. So a $4,000 gift with $1,700 designated and a $400 State credit still earns the full $1,700.
The credit can lower a donor’s federal income tax to zero, but it is never refunded. It applies after certain other credits, such as the child tax credit. Any unused amount carries forward for up to five years.
Under the proposed rules, a donor may give to an SGO on any State’s list, wherever the donor lives. Any part of a gift above what the donor claims for the credit may still count as a regular charitable deduction, under the usual rules.
Four tips for donors before your first 2027 ask:
- Each spouse should give at least $1,700.
- Business owners should give personally, not through the business.
- Designate the gift for the credit when giving, since that choice cannot be undone, and keep event tickets out of it.
- Keep the receipt the SGO sends by Jan. 31. Its donor ID number goes on new IRS Form 8525, so the SGO never needs the donor’s Social Security number.
What should we ask an SGO now?
Ask an established SGO already serving your State:
- Has it asked to be on our State’s 2027 SGO list, due Feb. 15, 2027?
- Has it registered in the IRS SGO portal, and will it appear on the public IRS list?
- Do its written policies expressly require it to meet the federal operating rules?
- Will it keep a separate account for these gifts?
- Are at least 85 percent of its activities scholarship granting?
- Who will do its annual audit?
- How will it verify family income?
- How fast do gifts become scholarships?
What is still open?
Where this stands: the bar on steering gifts is set. Which expenses count awaits separate guidance.
The law still bars donors from steering a gift to a particular student. Which school expenses a scholarship can cover will come later; Treasury calls that guidance a high priority. Whether homeschool or microschool costs count depends on whether your State treats them as a school, and on that guidance.
How can we weigh in?
Comments on the proposed rules are due in early December at regulations.gov (search for REG-117199-25). A public hearing is set for Dec. 15, 2026, if anyone asks to speak by the comment deadline.
For more detail, read our plain-language review of the rules for private schools.
Read the documents: the proposed rules and the temporary rules, both in the Oct. 2, 2026, Federal Register.
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 FSTC could mean for your students.
