What the New Federal Scholarship Tax Credit Could Mean for Pennsylvania
The new federal scholarship tax credit is one of the most significant education funding opportunities in years, designed to help families pay for private school tuition, tutoring, academic support, and other qualified K–12 education expenses.
If Pennsylvania participates, this program could unlock new scholarship funding for thousands of students across the Commonwealth, giving more families access to the schools, support services, and learning tools that fit their children’s needs.
For donors, the program offers a powerful way to support K–12 educational opportunity while potentially receiving a dollar-for-dollar federal income tax credit. For families, it may create a new path to scholarship support beginning in 2027.
October 2026 Update: Treasury and the IRS have now issued proposed regulations under Section 25F together with companion temporary regulations. The temporary regulations establish important procedures for state elections, SGO registration, donor acknowledgments and qualified-contribution reporting. The proposed regulations provide additional guidance regarding taxpayers, student eligibility, SGO operations and scholarship administration. This article was originally published before those regulations were released.
What Is the Federal Scholarship Tax Credit?
Under Internal Revenue Code Section 25F, individual taxpayers may receive a federal tax credit of up to $1,700 per year for qualified contributions made to approved Scholarship Granting Organizations.
This is not simply a deduction. A tax credit reduces federal income tax owed dollar-for-dollar, making the program especially meaningful for taxpayers who want their charitable giving to support educational opportunity.
Dollar-for-Dollar Credit
Qualified taxpayers may receive a federal income tax credit, not just a deduction.
Individual Taxpayers
The federal credit is designed for individual taxpayers, not business entities.
K–12 Education
Scholarships are intended to help eligible students access qualified elementary and secondary education expenses.
Begins in 2027
Taxpayers are expected to begin claiming the credit for qualified contributions made in January 2027.
In simple terms: donors contribute to an approved Scholarship Granting Organization, and those funds are used to provide scholarships for eligible K–12 students.
Who Qualifies for Scholarships?
The law defines eligible students broadly, which means a large percentage of families may qualify for scholarship support if their state participates in the program.
Eligible students generally must:
Be eligible to enroll in a public elementary or secondary school and come from a household with income not greater than 300% of the area’s median gross income.
Why this matters for families
This income threshold could make scholarships available to many working and middle-income families, not only the lowest-income households.
For Pennsylvania families, the size and reach of the opportunity will depend heavily on whether the state participates and which Scholarship Granting Organizations are approved.
What Can Scholarships Be Used For?
Section 25F incorporates the qualified elementary and secondary education expenses described in Internal Revenue Code Section 530. Depending on the circumstances and applicable requirements, eligible expenses may include:
Important: Each expense must satisfy Section 530 and applicable IRS guidance. Not every after-school activity, enrichment program, electronic device, software purchase or educational service automatically qualifies.
Scholarships received through the program are not expected to be treated as taxable income to families, increasing their practical value for students who receive support.
How Scholarship Organizations Qualify
Scholarship Granting Organizations will play the central role in administering the program. To participate, organizations must meet strict federal requirements designed to ensure compliance, transparency, and broad student access.
SGOs must generally:
- Operate as a qualified nonprofit organization.
- Use at least 90% of income for scholarships.
- Verify student eligibility and household income.
- Maintain appropriate accounts and records for contributions.
- Avoid earmarking donations for specific students.
Why compliance matters
These requirements are intended to protect families, donors, schools, and participating states by ensuring scholarship funds are awarded fairly and used for qualified education expenses.
As additional guidance is released, SGOs will need clear systems for accounting, eligibility review, donor reporting, audits, and scholarship administration.
Does Pennsylvania Participate?
The federal program requires states to opt in. For Pennsylvania families to benefit directly from scholarships funded through Pennsylvania-approved SGOs, the Commonwealth must participate and provide the IRS with a list of eligible Scholarship Granting Organizations located in the state.
A Pennsylvania taxpayer may potentially make a qualified contribution to an eligible SGO in another participating state. Under the October 2026 proposed regulations, however, Section 25F scholarships generally must benefit eligible students who reside in the state for which the SGO is listed, subject to limited exceptions. Therefore, if Pennsylvania does not participate, Pennsylvania students generally could not receive Section 25F-funded scholarships through an SGO listed only in another state.
For Pennsylvania families, schools, donors, and scholarship organizations, state participation is the key question to watch as the 2027 launch approaches.
How to Access Scholarships in Pennsylvania
Organizations like Friends of Education have extensive experience administering scholarship programs under Pennsylvania’s existing tax credit framework. As federal guidance is released, experienced scholarship organizations are expected to play an important role in connecting families and donors with available opportunities.
Families Stay Informed
Families should watch for updates on Pennsylvania participation, student eligibility, scholarship availability, and approved SGOs.
Donors Prepare
Donors can begin learning how the federal tax credit works and how qualified contributions may support student scholarships.
SGOs Build Systems
Scholarship organizations will need strong compliance, reporting, eligibility verification, and scholarship administration processes.
Questions About the Federal Scholarship Tax Credit?
If you are interested in the federal scholarship tax credit, want to understand eligibility, or are considering participating as a donor or family member, Friends of Education is here to help.
Note: This article is provided for general informational purposes only and should not be treated as tax, legal or financial advice. Since this article was originally published, Treasury and the IRS have issued proposed and temporary Section 25F regulations. Families, donors, schools and scholarship organizations should review current IRS and Treasury guidance and consult qualified advisers regarding their specific circumstances.
