Eight questions private schools need the Federal Scholarship Tax Credit rules to answer

Update, Oct. 2, 2026: Treasury has released the rules. Read what they mean for private schools.

For private and tuition-based schools, the Federal Scholarship Tax Credit (FSTC) is a new federal source of scholarship funding. Beginning Jan. 1, 2027, individuals can claim a federal tax credit of up to $1,700 for a cash gift to a scholarship granting organization (SGO) in a participating state. (IRS, Federal Scholarship Tax Credit)

But the details that decide how the program works for your school are in rules that haven’t been published yet. They are close.

Where the rules stand (as of Sept. 30, 2026)

The White House Office of Information and Regulatory Affairs finished reviewing two Treasury actions on Sept. 29: a proposed rule and an interim final rule (temporary rules issued alongside the proposed rule), both titled “Tax Credit for Contributions of Individuals to Scholarship Granting Organizations.” (reginfo.gov, RIN 1545-BR97; reginfo.gov, RIN 1545-BS17) White House review is typically the last step before a rule is published.

Treasury said in June that it expected to issue proposed regulations “no later than the end of September,” and that “States, SGOs, and taxpayers will be able to rely on those proposed regulations for tax year 2027.” (Treasury, Preview of Forthcoming Section 25F Guidance, June 9, 2026)

What the law already settles

The donor credit is set: up to $1,700 per taxpayer per year, reduced by the amount of any state tax credit allowed “for qualified contributions made by the taxpayer during the taxable year,” with no charitable deduction for the same dollars. (26 U.S.C. 25F) How far that reduction reaches is still open; see question 8 below.

The credit is for individuals only; a business cannot claim it. Gifts must be cash. The credit is nonrefundable, and unused credit carries forward for up to five years. Eligible students are those “eligible to enroll in a public elementary or secondary school”; the law does not require that they attend one. (26 U.S.C. 25F)

The SGO rules are set too. An SGO must spend at least 90 percent of its income on scholarships and must serve 10 or more students “who do not all attend the same school.” (IRS, Notice 2025-70) Under the statute, an SGO “does not earmark or set aside contributions for scholarships on behalf of any particular student,” and gives priority first to “students awarded a scholarship the previous school year” and then to eligible students “who have a sibling who was awarded a scholarship from such organization.” (26 U.S.C. 25F) Eligible students come from households at or below 300 percent of area median gross income, measured “for the calendar year prior to the date of the application for a scholarship.” (26 U.S.C. 25F)

An SGO also may not award a scholarship to a disqualified person, under rules similar to those for private foundations: substantial contributors, the organization’s managers, and their close family. (26 U.S.C. 25F; 26 U.S.C. 4946) Treasury has floated defining a substantial contributor as anyone who has given more than 2 percent of an SGO’s total contributions since it began, which is easier to cross at a small SGO than a large one. (IRS, Notice 2025-70)

Most schools will do better working with an SGO than building one. An SGO has to be its own 501(c)(3) that keeps separate accounts for FSTC gifts, verifies family income, and reports on each contribution and each scholarship. (IRS, Notice 2025-70) Treasury also previewed an annual audit by an independent third party, with a streamlined alternative for smaller SGOs: an internal committee unrelated to management, signing under penalties of perjury. (Treasury, June 9, 2026) All of that has to be paid for out of the 10 percent an SGO may keep. Our view: even with the streamlined audit, the fixed costs of income verification, reporting and separate accounting are far easier to absorb at scale. Look for an SGO that can show it will carry that compliance work, so you can focus on your families.

Gifts increase the scholarship funding available to eligible students. They are not earmarked for a particular student.

The open questions the rules need to answer

1. Will existing scholarship organizations qualify? No source says a state scholarship organization becomes a federal SGO automatically. Treasury has said it expects the proposed regulations to require each state list to include every in-state organization that has “requested to be designated as an SGO” and meets the federal requirements. (IRS, Notice 2025-70) Read that two ways: an organization has to ask, and a state that elects is expected to list every qualifying organization that does. The IRS also asked about organizations in states with similar tax credits that “currently have structures or operations not expressly addressed in this notice,” and the federal 90 percent test differs from state formulas.
2. How is the 90 percent test measured? Treasury previewed a safe harbor that would measure “income of the organization” by “the amount held in a section 25F segregated account,” available “if the organization’s activities are largely scholarship-granting activities.” (Treasury, June 9, 2026) What “largely” means may decide whether diocesan and multi-program foundations can take part directly.
3. Can a donor designate a school? The law bars earmarking for a particular student. Whether a donor may direct a gift to a particular school is not settled. Writing for the National Catholic Educational Association, Sr. Dale McDonald said donors “may designate funds for a particular school” (NCEA Talk, Jan. 22, 2026), while the law firm Venable called it “unclear whether this rule also prohibits contributions from being directed to students attending a particular school or group of schools.” (Venable LLP, Aug. 21, 2025)
4. Can married couples give $3,400? 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. A bill introduced in September, H.R. 10413, would allow married couples filing jointly “to claim the tax credit up to an amount that is double the cap for individual filers.” The same package, H.R. 10412, would remove the state election requirement altogether, and Sen. Bill Cassidy introduced companion legislation in the Senate. Neither has passed. (Office of Rep. Adrian Smith, Sept. 17, 2026)
5. What will SGOs have to report and audit? Beyond the audit, Treasury previewed an IRS portal that may “develop in phases,” and a donor number generated under an IRS-provided method so donors do not give their Social Security numbers to the SGO. (Treasury, June 9, 2026)
6. Which expenses beyond tuition count? Treasury said expense guidance will be “a separate workstream that will follow” the proposed regulations. (Treasury, June 9, 2026)
7. When are state SGO lists due for 2027? Notice 2025-70 anticipates a date “before January 1, 2027,” and Rev. Proc. 2026-6 says the final date will be “specified in future guidance.” (IRS, Notice 2025-70; IRS, Rev. Proc. 2026-6)
8. How does the state-credit reduction work? The law reduces the federal credit by any state credit “for qualified contributions made by the taxpayer during the taxable year.” Whether that means only a state credit on the same gift, or any state credit on gifts to a listed SGO that year, is not settled. The IRS has asked states what information they can provide to police the rule. (26 U.S.C. 25F; IRS, Notice 2025-70)

If your state has not yet elected to participate

Participation is a state decision. A state must elect, and must submit a list of SGOs, before donors can claim the credit for gifts to SGOs in that state. The IRS keeps the current list of participating states on its FSTC page. In a state that has not yet made its election, residents can still claim the credit for a gift to an SGO in a participating state, but those scholarships serve students in that state. (26 U.S.C. 25F) Until your state elects and submits its list, no scholarship under this program can reach its students, so the timing of that decision is worth watching.

One more rule you may have seen this month

On Sept. 3, Treasury and the IRS proposed separate regulations on tax-exempt status for private schools that engage in racial discrimination. (IRS, IR-2026-103, Sept. 3, 2026) That is a different rule under a different section of the tax code. It is not part of the scholarship tax credit.

What to do before the rules land

If an SGO approaches you before the rules are out, ask it five things:

1. Will it keep a separate account for FSTC gifts?
2. What is its audit plan?
3. How will it verify family income?
4. What does the SGO charge, and how much of each gift does it keep?
5. How long does it take from gift to scholarship payout? One diocesan SGO reports about 10 months.

It’s also worth knowing roughly how many of your families fall at or below 300 percent of area median gross income, as long as nobody is promised a scholarship on the strength of that estimate.

Wait on structure, not on donors. The people who already support your school can learn about the credit now. Decisions about how your school organizes itself around the program can wait. As the law firm Archer put it: “we recommend against locking in final structural decisions until those regulations are released, unless the state timeline requires earlier action.” (Archer Law, Kayci D. Petenko, March 16, 2026) For most schools that means getting ready now, and holding off on restructuring until the proposed regulations are out or your state’s SGO list deadline forces the question.

Nothing here is legal or tax advice. The rules, when issued, and any later guidance will 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.