On Sept. 30 we listed the questions public schools needed the Federal Scholarship Tax Credit (FSTC) rules to answer. They are now out. Here is what they mean for you.
What did Treasury release?
On Oct. 1, Treasury and the IRS released two documents: temporary rules and a full set of proposed rules.
The temporary rules apply back to Sept. 1, 2026, and expire no later than Oct. 1, 2029. They cover how States sign up and list their scholarship granting organizations (SGOs), and how SGOs register with the IRS and report on donors. An SGO is the nonprofit that collects the gifts and awards the scholarships.
The proposed rules are open for public comment and could change. Even so, donors, SGOs and States can rely on them for gifts made starting Jan. 1, 2027, in tax years that end before final rules are published. The condition: each must follow the parts that apply to it completely and consistently.
Which services will scholarships pay for?
Where this stands: waiting on separate guidance.
The law ties scholarships to the list of K-12 expenses already allowed for education savings accounts. Neither document yet says whether services your school offers, such as after-school, summer, transportation or technology, count.
Treasury says separate guidance on which expenses count is coming, as a high priority.
Your State cannot narrow the kinds of expenses scholarships can cover; that is already set. Treasury even uses an SGO that tutors public school students as its example.
Under the proposed rules, a student who can enroll in a public school may get a scholarship the summer before school starts. It can cover expenses tied to enrolling that year.
Under the proposed rules, money for tuition and similar charges your school bills goes directly to the school, which must return any overpayment.
Can your school play a direct role?
Where this stands: proposed, so it could change after comments.
One part of the proposed rules gives schools a real role.
It covers one-on-one academic tutoring and special needs services at schools in low-income areas. If the school picks each student based on individual academic or other need, those students count as meeting the program’s household income limit. No one has to verify household income.
To qualify, the school must sit in a qualified census tract, a low-income area mapped by the U.S. Department of Housing and Urban Development (HUD). Or it can certify that at least 80 percent of its students live in one. Look up tracts on HUD’s census tract map.
The paperwork falls on the SGO: a yearly third-party audit, given to the State. It confirms, among other things, that providers were qualified and that each student’s need was independently diagnosed by a professional with no tie to the provider.
Under the proposed rules, anyone who helps choose scholarship recipients, and that person’s family, cannot receive a scholarship from that SGO. Here the school does the choosing. So it is unclear whether family of staff who pick students could receive these scholarships. Ask your SGO before staff take on that role.
What does it take to be an SGO?
Where this stands: already set.
An SGO must be a tax-exempt public charity, not a private foundation. It must be located in the State: authorized to do business there and following the State’s charity rules. It must serve at least 10 students who do not all attend the same school. It must spend at least 90 percent of its income on scholarships. An SGO can also choose its own focus, such as certain subjects or families with lower incomes. A State cannot impose one.
An SGO that plans to ask for these gifts must register in the IRS SGO portal. It should do so early, ideally before it appears on any State list. Until it registers, it cannot send donors the paperwork they need to claim the credit. Most schools and foundations do better partnering with an established SGO.
What can your State add?
Where this stands: already set.
Your State cannot hold SGOs to a stricter standard than the federal requirements. For example, it cannot limit which schools students attend or which expenses scholarships cover.
It must require SGOs to follow its general charity rules, plus application, documentation and financial reporting rules. Those rules must be reasonably tied to what the State needs to approve each SGO and catch fraud.
Your State can remove an SGO, but only after giving it notice and a fair chance to respond. Grounds include not being located in the State, not meeting the federal requirements, or not following the federal or State operating rules. It must remove any SGO that asks to come off.
When does your State have to act for 2027?
Where this stands: already set.
A State takes part by making an election, a formal sign-up with the IRS. For 2027, a State must file that sign-up (the IRS calls it an advance election) by Jan. 1, 2027. It may then send in its list of SGOs by Feb. 15, 2027.
After Feb. 15, a State cannot add SGOs to its 2027 list unless later guidance allows it. If a State elects early but misses the list deadline, no organization in that State counts as an SGO for that year.
What about charter schools?
Where this stands: not answered in these documents.
Neither document says how the rules apply to charter schools. That includes how the law’s 10-student, more-than-one-school requirement fits a nonprofit tied to a single charter school.
What should donors know?
Where this stands: partly set by law, partly 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 cap comes from the law; treating spouses separately is proposed.
If a donor also gets a State tax credit for the same gift, the law reduces the federal credit by that amount. Under the proposed rules, the State credit is subtracted from the gift first, and the $1,700 cap applies to what is left.
Under the proposed rules, a donor may give to an SGO on any State’s list, no matter where the donor lives.
Under the proposed rules, any part of a gift above what a donor claims for the credit may still count as a regular charitable deduction, under the usual rules.
The law also bars directing a gift to a particular student.
Which students qualify?
Where this stands: the income limit is set by law; the rest is proposed.
A student’s household income must be at or below 300 percent of the area median gross income. Under the proposed rules, that limit is adjusted for family size, and children in foster care count as meeting it. Treasury estimates that about 96 percent of children in participating States would be eligible.
What if your State has not signed up yet?
Where this stands: proposed, so it could change after comments.
Under the proposed rules, a student must live in the SGO’s State to receive a scholarship. Attending school there is not enough. The exceptions are for military families and families living on Tribal lands.
Students in a State that has not signed up cannot get FSTC scholarships, apart from those exceptions. The IRS must post the list of signed-up States on irs.gov; that part is already set. For updates, watch the IRS FSTC page.
What should you do now?
- List the tutoring, special needs, after-school, summer, transportation and technology services families pay for, or would if cost were not the barrier.
- Do not start charging for services you already provide free; which expenses count is still waiting on guidance.
- Check whether your schools sit in a qualified census tract, or whether at least 80 percent of students live in one.
- Find out which SGOs will serve your State, because donors give to SGOs on a State’s list, not to schools.
- Decide whether to comment on the proposed rules.
Comments are due in early December at regulations.gov (search for REG-117199-25). A public hearing is set for Dec. 15, 2026, at 10 a.m. Eastern Time, with a telephone option. It will be held only if someone asks to speak by the comment deadline.
For more detail, read our plain-language review of the rules for public schools.
Read the documents: the proposed rules and the temporary rules, on the Federal Register site.
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.
