On Oct. 1, 2026, the Treasury Department and the Internal Revenue Service (IRS) released the rules for the Federal Scholarship Tax Credit (FSTC), the new federal tax credit for gifts to scholarship granting organizations (SGOs).
There are two documents, both titled “Federal Scholarship Tax Credit” and published in the Federal Register on Oct. 2, 2026. The temporary regulations cover how states sign up and list SGOs, and how SGOs register and report. The proposed regulations cover the whole program. Donors, SGOs and states may rely on the proposed regulations for gifts made on or after 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 private schools. 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. If at least 85 percent of an SGO’s work is granting scholarships, the proposed regulations would also let it measure the 90 percent spending test on its separate account for these gifts instead of its total income.
Below are the eight questions we set for private schools before the documents came out, what the documents say, and each answer’s status. If your school works with FundEDU, this is the review we use with you.
What the law already says
These points come from the law and the IRS program page, not the new documents.
Starting Jan. 1, 2027, individuals can claim a federal tax credit of up to $1,700 per taxpayer for a cash gift to an SGO in a participating state (IRS program page). Businesses cannot claim it. The credit can cut a donor’s tax bill but is never paid out as a refund. Unused credit carries forward up to five years. A student must be eligible to enroll in a public elementary or secondary school, but need not attend one (read the law).
Under the law, an SGO may not earmark or set aside gifts for any particular student. Gifts increase the scholarship funding available to eligible students.
What the documents say, question by question
Each answer has a status. Settled means it rests on the temporary regulations or the law itself. Proposed means it rests on the proposed regulations: you may rely on it for gifts made from Jan. 1, 2027, but it could change after public comment. Still open means the documents do not answer it. Deferred to later guidance means Treasury says separate guidance will.
Question 1: Will existing scholarship organizations qualify?
Status: Settled
Not automatically. An organization that runs a state tax credit program must still meet the federal SGO requirements on its own. A gift to one that is not on a state’s SGO list does not qualify.
The organization has to ask. Each state certifies that its list includes every qualifying organization in the state that asks to be listed. The organization must also register in the IRS SGO portal as soon as possible, ideally before it appears on any state’s list. It must keep a separate account for these gifts and follow the federal operating rules.
Two provisions help. Under the temporary regulations, a state may rely on the governing documents and written policies of an organization that has not yet reported to the IRS on its operations. And the proposed 85 percent safe harbor (Question 2) is meant to let one organization run a state tax credit program and the federal program side by side.
Question 2: How is the 90 percent test measured?
Status: Proposed
The law requires an SGO to spend at least 90 percent of its income on scholarships. The proposed regulations measure that income as all of the SGO’s gross receipts from every source, before any expenses, not just gifts under this program.
There is a safe harbor, an easier path. If an SGO is listed in only one state and at least 85 percent of its work is granting scholarships, under this program or any other, it may apply the operating rules to its separate account for these gifts alone. That includes the 90 percent test. Administration, fundraising, compliance and similar work count as scholarship work to the extent they support scholarships. An SGO listed in more than one state must meet the 85 percent test and keep a separate account for each state.
Below 85 percent, Treasury says, the separate account is not a reliable stand-in for the whole organization. So a diocesan or multi-program foundation below the line would be measured on its total income.
The test is met if money is spent by the end of the year after it comes in. Treasury asks how the 85 percent should be measured and whether it is the right line.
Question 3: Can a donor designate a school?
Status: Still open
The documents do not say whether a donor may direct a gift to a particular school or group of schools. They repeat the law’s bar on earmarking for any particular student.
The documents provide for only two donor designations. The donor marks the gift for this credit when giving, and that choice cannot be undone. If the SGO is listed in more than one state, the donor also picks which state’s account gets the gift. Separately, an SGO may narrow its own focus, for example by subject area or household income level.
Question 4: How do married couples filing jointly claim the credit?
Status: 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 $1,700 limit is in the law itself. In Treasury’s example, each spouse gives $2,000 and marks it for the credit, and each gift supports a $1,700 credit on the joint return. Each spouse must make his or her own gift. The credit is still limited by the tax the couple owes, and unused credit carries forward.
The law bars a charitable deduction for any part of a gift that earns this credit. Under the proposed regulations, 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 the same example, the couple’s other $600 may be deductible on those terms.
Question 5: What will SGOs have to report and audit?
Status: Settled
The temporary regulations set reporting now. An SGO registers in the IRS SGO portal, which explains how to give each donor a unique number in a standard format. By Jan. 31 of the year after the gift, the SGO sends each donor a written acknowledgment with that number. By Feb. 28 of that year, it reports each donor’s name, address and total gifts for the credit to the IRS.
Under the proposed regulations, donors would put that number on new Form 8525, so they need not give the SGO a Social Security number. Each year the SGO would also certify that it followed the rules and report scholarship data, attached to its Form 990 if it files one.
The proposed regulations would also require a yearly audit of every SGO’s finances and programs, sent to each state that lists it. An SGO taking in more than $500,000 would use an outside, independent professional or accredited body. A smaller one could use a committee of independent people unrelated to its management, who sign the report under penalty of perjury.
Question 6: Which expenses beyond tuition count?
Status: Deferred to later guidance
Treasury intends to issue separate guidance, under the tax rules for Coverdell education savings accounts, on which expenses count. Treasury calls it a high priority and intends to issue it as soon as possible so people can rely on it. No date is given.
The proposed regulations do cover how money moves. Tuition, fees and similar charges would be paid straight to the school, which must return any payment above the student’s costs or made in error. Other vendors can be paid directly if verified and unrelated to the student. Families can be reimbursed only against receipts. An SGO may also pay through a “qualified digital wallet,” an online payment platform run by an outside provider.
Under the temporary regulations, a state may not limit which qualifying expenses an SGO pays for.
Question 7: When are state SGO lists due for 2027?
Status: Settled
For 2027, a state must sign up by filing an advance election on Form 15714 by Jan. 1, 2027. It may submit its SGO list on or before Feb. 15, 2027. After that, it cannot add organizations to its 2027 list unless guidance allows; later additions go on the next year’s list. If a state signs up but misses the list deadline, no organization in that state qualifies as an SGO that year.
Question 8: How does the state-credit reduction work?
Status: Settled for the reduction itself and each state’s description of its credit; Proposed for how the reduction is applied
The law reduces the federal credit by any state tax credit allowed for the donor’s gifts for this credit that year (read the law).
The proposed regulations read this as the same gifts only. A state credit for a gift not marked for this credit does not reduce the federal credit. If one gift earns a state credit and only part is marked, the state credit applies first to the unmarked part.
Under the proposed regulations, the reduction comes before the $1,700 cap. In Treasury’s example, $2,000 in gifts with a $400 state credit leaves a $1,600 federal credit. Treasury also says a state tax deduction, unlike a credit, generally does not affect the federal credit.
Under the temporary regulations, each state that signs up must describe in its election any state tax credit it offers for gifts to SGOs.
What is still open
Two of the eight questions are not answered yet: which expenses beyond tuition count (Question 6), and whether a donor may direct a gift to a particular school (Question 3). Anything resting on the proposed regulations can still change after public comment. Treasury asks for comments on every part of them.
How to comment
Comments go to the proposed regulations, file number REG-117199-25; the temporary regulations send readers there too. Comments must arrive within 60 days after the Oct. 2, 2026, publication. Treasury strongly encourages commenting online at regulations.gov, marked with 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. Comments will be made public and cannot be edited or withdrawn.
A public hearing is set for Tuesday, Dec. 15, 2026, at 10 a.m. Eastern Time (ET) at the IRS building, 1111 Constitution Avenue NW, Washington, D.C., and by phone. To speak, send a request and an outline of your topics by the comment deadline. If no outlines arrive, the hearing is cancelled. To attend, email publichearings@irs.gov by 5 p.m. ET on Thursday, Dec. 10, 2026.
If your state has not yet made its election
Taking part is each state’s choice. A state must sign up and submit a list of SGOs before donors can claim the credit for gifts to SGOs there. The IRS lists participating states on its program page. The 2027 deadlines are in Question 7. Each election covers one calendar year. A state first signing up after 2027 will follow later guidance.
Residents of a state that has not signed up can still claim the credit for a gift to an SGO in a participating state. The proposed regulations let a donor give to an SGO on any state’s list, wherever the donor lives. But those scholarships serve students in that other state. The law limits them to eligible students in the state where the SGO is listed (read the law), and the proposed regulations read that as where the student lives.
So a student who lives in a state that has not signed up, but attends school in one that has, generally cannot get a scholarship from an SGO in either state. The proposed regulations make two exceptions. A dependent of a member of the Armed Forces can be served in both the student’s home state and the state where the service member lives. A dependent of someone living on Indian Lands can be served in both the state where the student lives and the state where the student attends school.
What this means for your school before 2027
Keep three rules in view. Tuition and similar charges would be paid straight to your school, which would return overpayments and payments made in error (Question 6). SGOs must register with the IRS as soon as possible, and 2027 state lists close Feb. 15, 2027 (Questions 1 and 7). Donors must mark a gift for the credit when giving, and that choice is final (Question 3).
For most schools, the practical step is to work with an SGO already serving your state that can show it will carry the compliance work, so you can focus on your families. Ask it five things:
- Will it keep a separate account for gifts under this program?
- What is its audit plan?
- How will it verify family income?
- What does the SGO charge, and how much of each gift does it keep?
- How long does it take from gift to scholarship payout?
It also helps to know roughly how many of your families are at or below 300 percent of area median gross income, which under the proposed regulations is adjusted for family size. Under the proposed regulations, children in foster care count as meeting the income limit whether or not their household income is checked. In their economic analysis of the proposed regulations, 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. Just do not promise anyone a scholarship based on your own estimate.
Where to read the documents
- The proposed regulations, REG-117199-25, Federal Register document 2026-20277, Oct. 2, 2026
- The temporary regulations, Treasury Decision 10057, Federal Register document 2026-20264, Oct. 2, 2026
The IRS posts program updates on its program 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.
