What did Congress pass and President Trump sign into law?

On July 4, 2025, Congress passed and President Donald Trump signed H.R. 1, commonly called the One Big Beautiful Bill Act. Section 70411 of that law created a new nonrefundable federal income tax credit (Internal Revenue Code §25F) for cash donations to qualified SGOs. Those organizations provide scholarships to K–12 students for expenses such as tuition, books, tutoring, and special-needs services. A companion provision (IRC §139K) excludes qualifying scholarships from the recipient family’s federal gross income.

Taxpayers receive the credit by donating cash directly to a qualified SGO of their choice. The SGO then uses those donations to award scholarships. The credit is capped at $1,700 per taxpayer per year.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in the income tax a person owes, unlike a deduction, which only lowers the income that is taxed. Credits can be refundable (any leftover amount is paid out) or nonrefundable (the credit can reduce the bill to zero, but not below). This scholarship credit is nonrefundable. Unused amounts may be carried forward for up to five years.

With a tax-credit scholarship program, the taxpayer redirects money that would otherwise have gone to the federal Treasury and instead donates it to a private nonprofit that must spend the funds as the statute requires. The donation itself never enters a state or federal spending account. The credit reduces federal tax collections (a tax expenditure). The Joint Committee on Taxation estimated the provision at about $26 billion over 10 years.

What is a Scholarship Granting Organization?

A Scholarship Granting Organization is a 501(c)(3) public charity that awards educational scholarships to elementary and secondary students. SGOs solicit donations, set award procedures within federal rules, process applications, and verify that applicants meet eligibility criteria.

Federal tax-credit scholarships may cover costs already defined as “qualified elementary or secondary education expenses” for Coverdell education savings accounts (26 U.S.C. §530(b)(3)(A)). That list includes tuition, fees, academic tutoring, special-needs services, books, supplies, equipment, room and board, uniforms, transportation, supplementary school services, and certain computer and internet costs tied to school enrollment. These scholarships are not vouchers and are not paid with appropriated state dollars. After applying the statutory eligibility and priority rules, the SGO awards scholarships that students may use at public or private schools.

How does the federal tax credit scholarship work? What are the limitations and requirements of the tax credit?

Taxpayers may still donate any amount to an SGO and, if they itemize, claim a regular charitable deduction under IRC §170 for amounts that do not generate this credit. The new program adds a separate option: a dollar- for-dollar federal income tax credit of up to $1,700 for cash contributions to a qualified SGO. Families with joint filers may receive up to $3,400 for their tax credit if the donations are separately made between the joint filers. A contribution used for the credit cannot also be deducted as a charitable gift.

The $1,700 per person cap may be reduced by any state tax credit claimed for the same donation. Only cash contributions to SGOs that appear on a participating state’s IRS list qualify. Those organizations must spend at least 90 percent of their income on scholarships and may not earmark gifts for a particular student. The credit applies to the tax year of the contribution. A donation made in 2027 reduces 2027 federal income tax (claimed on the return filed in 2028).

Are federal tax credit scholarships good for education in California?

The credit gives families another way to fund educational options outside (and alongside) the traditional public system. More donations to SGOs mean more scholarships, without a new line item in California’s budget. This program differs from Education Savings Accounts (ESAs). ESAs are funded with public dollars, usually from a state’s general fund, and deposited into a restricted-use account for participating students. Parents may typically use ESA funds for private school tuition, tutoring, therapies, homeschool curriculum, and online learning. ESA rules often exclude students who remain enrolled in a district public or charter school. SGOs use no state appropriation. They are privately funded nonprofits operating under federal rules.

ESA bills have been proposed in California and have not become law, largely because of fights over using public dollars for private education. The federal credit offers a different path: expanded opportunity that does not draw from California’s general fund.

What are the criteria for an SGO to be “qualified”?

An SGO qualifies only if a state (or the District of Columbia) elects to participate and includes the organization on the list it submits to the IRS. The governor or another officer designated by state law makes that election. The organization must be a 501(c)(3) public charity, keep qualified contributions in separate accounts, and appear on that state list.

The SGO must provide scholarships to 10 or more students who do not all attend the same school. It must spend at least 90 percent of the organization’s income on scholarships for eligible students (administrative costs therefore cannot exceed 10 percent of income). Treasury has indicated that forthcoming regulations may clarify whether “income” means all receipts or, under a safe harbor, amounts held in the segregated §25F account.

Scholarships may go only to K–12 students who are eligible to enroll in a public elementary or secondary school and whose household income, for the calendar year before the application, is not greater than 300 percent of area median gross income (the measure used in IRC §42). Using HUD median family income, that ceiling was

about $585,600 in Santa Clara County and $219,300 in Imperial County on FY 2025 figures (the numbers used in the original article). On FY 2026 HUD figures, Santa Clara County’s 4-person median family income is $205,500, so 300 percent is about $616,500. Exact limits vary by household size and will follow Treasury and IRS guidance.

Federal law requires SGOs to prioritize students who received a scholarship the previous school year, and then eligible siblings of those students, before other applicants. That is not optional local criteria. Donors cannot direct a gift to a named student. The SGO must verify household income and family size. The listed SGO must use qualified contributions for scholarships to eligible students in the state that listed it. A donor does not have to live in that state.

What are some qualified elementary or secondary education expenses?

Students may use SGO scholarships for “qualified elementary or secondary education expenses,” as defined in 26 U.S.C. §530(b)(3)(A):

1. expenses for tuition, fees, academic tutoring, special-needs services in the case of a special-needs beneficiary, books, supplies, and other equipment incurred in connection with enrollment or attendance as an elementary or secondary student at a public, private, or religious school;
2. expenses for room and board, uniforms, transportation, and supplementary items and services (including extended-day programs) that are required or provided by a public, private, or religious school in connection with that enrollment or attendance; and
3. expenses for computer technology or equipment or Internet access and related services, if used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school. Clause (iii) does not include software designed for sports, games, or hobbies unless the software is predominantly educational.

What are some potential challenges for SGOs?

SGOs depend on a governor (or designated officer) electing to participate and listing them. Delay creates uncertainty and can slow fundraising. Because at least 90 percent of income must go to scholarships, administrative and fundraising costs must stay low.

Income verification, sibling and prior-award tracking, and the ban on earmarking require strong record-keeping. Treasury and the IRS are expected to issue implementing regulations (anticipated around Fall 2026). Until those rules are final, questions remain about how “income” is measured, how part-year attendance is treated, and how household income must be documented.

The 10-student, more-than-one-school rule can be a barrier for very small or brand-new organizations. The no-earmarking rule also constrains donor messaging. Mandatory priority for returning students and siblings promotes continuity but narrows the new-award pool.

How will scholarships be granted?

SSGOs set application procedures and award amounts, but they must follow the federal eligibility, verification, anti-earmarking, and priority rules. The 10-student and multi-school requirements exist so an SGO cannot function as a pipeline to one campus or one family. The 90 percent spending rule is meant to put most of the money on students. The income cap is meant to keep the benefit with lower- and moderate-income households. The priority rules reduce turnover for families already in the program.

Why should California opt in?

Parents, educators, and education leaders across party lines have argued the credit is useful because it can serve students in public, charter, and private schools and costs the state nothing to administer as a spending program. Former U.S. Education Secretary Arne Duncan (who served under President Obama) urged Democrats to support state participation, describing the program as a “no-brainer” in a November 2025 Washington Post op-ed. As of the IRS participating-state list dated September 14, 2026, California has not made an advance election for 2027.

States that have include Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.

The election is annual. A state that sits out 2027 can still join in a later year. If California stays out, California taxpayers can still claim the federal credit by donating to an SGO on another state’s list. Those dollars then fund students in the listed state, not in California. Opting in is the only way to keep the resulting scholarships in California.

I’m a taxpayer who wants to donate to an SGO. What happens if my state doesn’t opt in?

If California does not opt into the program, California residents may still take advantage of the tax credit by donating to an SGO in a participating state. Alternatively, if you want your contributions to stay in California, you can make a charitable contribution to a California-based SGO and claim a charitable deduction if you itemize, but your gift won’t be eligible for the tax credit.

California leaders should opt in if the goal is for those redirected federal tax dollars to serve California students rather than students in other states.