What did Congress pass and President Trump sign into law?

In July 2025, Congress passed and President Donald Trump signed House Resolution 1, also known as the One Big Beautiful Bill Act. The law provides for a new nonrefundable tax credit to incentivize donations to qualified SGOs that provide scholarships to students in grades K-12 to cover expenses like tuition, books, tutoring, and special needs services for students.

Taxpayers  receive the tax credit by donating directly to the philanthropic nonprofit SGO of their choice. The SGOs, in turn, use those donations to provide scholarships to students. The federal government has capped this tax credit at $1,700 per taxpayer.

What is a tax credit?

In general, a tax credit is a dollar-for-dollar direct reduction in the amount of income tax an individual owes to the government on their final tax bill, as opposed to a tax deduction which lowers the income that is taxed in the first place. Tax credits can be refundable if the credit exceeds the tax liability or non-refundable once the tax obligation is reduced to zero with no refund for the excess.

With tax credits, the government allows the taxpayer to direct the spending of their own money to support a charitable or public-purpose activity authorized by a legislative body. A tax-credit scholarship program allows taxpayers to redirect money that would have otherwise gone to the government treasury and instead donate it to a private, nonprofit philanthropic corporation to distribute that money according to the purposes outlined in statute.

What is a Scholarship Granting Organization?

A Scholarship Granting Organization (SGO) is a registered nonprofit that grants educational scholarships to elementary and secondary students. To fund these scholarships, SGOs solicit and receive donations from individuals, companies, foundations, etc. On a practical level, they formulate scholarship requirements, process applications, and verify that applicants meet eligibility criteria.

Federal tax credit scholarships can cover any costs already approved under the definition already used in Coverdell education savings accounts and include: private school tuition, tutoring costs, supplies for extracurricular activities such as band or sports uniforms, services to help with special education needs, and more. Federal tax credit scholarships are not vouchers or government dollars paying for education expenses. Rather, these scholarships are privately funded by taxpayers donating directly to the SGO. None of these donations touch any government accounts. After establishing criteria for awardees and metrics for the dollar value of scholarships, the SGO independently awards scholarships to accounts dedicated to the students in public, charter and private schools, giving them a broader range of academic opportunities.

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

Taxpayers may donate an unlimited amount of money to SGOs and file for a regular charitable tax deduction allowed under the Internal Revenue Code, but this program adds the new option of the tax credit that is not related to any tax deductible donations.

When taxpayers file their federal tax return with the Internal Revenue Service (IRS) to cover their income tax liability, the tax credit scholarship program allows them the option of contributing to a qualified SGO to reduce their federal income tax liability. For every dollar donated to an approved SGO, the taxpayer receives a dollar-for-dollar federal income tax credit up to $1,700, which may be more valuable than a deduction for that amount, depending on the income and tax obligation of the taxpayer.

There are several limitations and requirements. The federal credit is capped at $1,700, which may be further reduced if a taxpayer also receives a state tax credit for the same donation. Only contributions to federally recognized SGOs qualify, and these organizations must meet strict standards, including spending at least 90 percent of their income on scholarships and are prohibited from providing donor-directed gifts.

The tax credit applies to the tax year in which the contribution to the SGO is made. For example, to lower one’s tax liability for the 2027 tax year, a donor must have made their contribution to an SGO in 2027.

In short, the tax credit allows taxpayers to support educational opportunities for students through SGOs while reducing their own federal tax bill, within the certain defined limits.

Are federal tax credit scholarships good for education in California?

At a time when families are more curious than ever about educational opportunities outside traditional public education systems, the tax credit opportunity offers a gateway to expand educational possibilities. The more that is donated to SGOs, the more scholarships they can grant, freeing more students from the constraints of limited educational options.

All states, especially California, would benefit from the program, allowing nonprofit SGOs to facilitate greater educational opportunity without the need for additional spending by the California government.

This program differs from Education Savings Accounts (ESAs), which are funded directly by the government using public tax dollars, usually through the state’s general fund. With ESAs, the state deposits money into a restricted-use account for students who have opted into the program. Parents can use ESA funds for private school tuition, tutoring, therapies, homeschool curriculum, online learning, etc. and are not usually allowed for use by students enrolled in a public or charter school. Depending on the state, ESAs may be targeted for families with specific income levels, or they might be universal, meaning they are available to all students regardless of income. SGOs, on the other hand, use no government funding because they are privately funded and governed nonprofits.

While ESAs have been proposed in California, ESA legislation has failed to be enacted due to ongoing political disagreements over funding and the role of public dollars in private education. The federal tax credit scholarship program offers a different path — one that expands educational opportunity without requiring new state spending or drawing from California’s general fund.

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

For the SGO to be qualified to accept contributions and distribute scholarships under the federal tax credit program, it must be located in a state that opts into the program and be on an approved list from the governor. The opt-in process is simple: the state’s governor or other designated officer provides a list of approved SGOs to the federal government.

For purposes of the tax credit, the SGO must provide scholarships to “10 or more students who do not all attend the same school.” It must also spend 90 percent or more of its income on scholarships, which means administrative or overhead costs must remain under 10 percent of the SGO’s revenue. It may be the case that the 10 percent rule applies only to revenue received under the tax credit program rather than all SGO recenue; the federal government will put forward more specifics in the coming months.

Additionally, scholarships can only be provided for K-12 education for families earning less than 300 percent of the median gross income for families in their area, which could be up to $585,600 in Santa Clara County or as low as $219,300 in Imperial County. These qualifications will be further refined by the federal Department of the Treasury over the next few months.

Students may be prioritized if they received a scholarship previously or if their sibling was awarded a scholarship depending on the SGO’s criteria. This often promotes continuity, but limits flexibility in the pool of recipients. Donors cannot stipulate a particular student receive a scholarship from the SGO, safeguarding against misuse. The SGO must verify family income and size to ensure eligibility and apply a household income cap.

What are some qualified elementary or secondary education expenses?

Students who receive scholarships from SGOs may use them for “qualified elementary or secondary education expenses,” which are described in federal law [26 U.S. Code §530(b)(3)(A)] as:

(i) expenses for tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary of the trust as an elementary or secondary school student at a public, private, or religious school,

(ii) expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) which are required or provided by a public, private, or religious school in connection with such enrollment or attendance, and

(iii) expenses for the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.

What are some potential challenges for SGOs?

SGOs are dependent on governors opting in and listing them as a qualified entity to grant scholarships. Governors who delay in opting into the program create uncertainty for interested SGOs and may delay their ability to raise and distribute funds to needy students. And because the statute requires at least 90 percent of the SGO’s income to go to scholarships directly, administrative and fundraising costs must be low, leaving little margin for marketing and growth.

Given the verification requirements for income, siblings, prior award, etc., the SGO must have robust record-keeping systems, especially because the statute signals that the IRS (through the Treasury) will issue regulations under the law for enforcement of these requirements. Since donor contributions cannot be earmarked for a specific student, SGOs must have processes to avoid such earmarking (for example, accepting donations generically, then awarding scholarships via a separate board process).

The 10-student threshold might exclude very small SGOs or new entrants and serve as a potential barrier to entry.

The rule that contributions cannot be earmarked could impact donor relations or marketing (some donors may want to designate a student or region), and fundraising messaging will need to reflect this reality. Enforcement and interpretation details (e.g., which “income” counts for 90 percent test, how to handle scholarships for part-year attendance, how to verify household income) may be uncertain until the Treasury Department issues guidance.

Maintaining priorities for eligible family members of awardees may limit the scholarship pool and displace other eligible applicants. SGOs will need clear policies and transparency to avoid claims of unfairness.

How will scholarships be granted?

SGOs will need to develop a set of criteria to identify and qualify eligible students for the scholarship. They have some flexibility over those qualifications and the process by which they choose awardees.

The law and rules to be adopted by the Department of the Treasury aim to ensure that qualified students have a chance to get an SGO scholarship, rather than donors using SGOs to earmark and direct money to specific students (for example, children of friends). The “minimum 10 students” and “not all attend the same school” requirements are in place so that SGOs broadly serve students in the community, rather than funneling funds to a particular group of students at a particular school. The requirement that 90 percent of SGO spending goes to scholarships is written into the law to maximize the benefit to students.

The income verification and household cap aims to direct the benefit to lower- and moderate-income households rather than high-income households. The priority rules for previous awardees and siblings helps create continuity for students and families, as well as reduce the administrative burden for SGOs compared to having to select all new awardees every year.

Why should California opt in?

Parents, educators, and education experts of all political persuasions see value in these federal tax credit scholarships, which offer opportunity to students of all backgrounds, including those in public schools. While the program was signed into law under a Republican presidential administration, former Secretary of Education Arne Duncan (who served as the Secretary of Education under President Barack Obama) voiced strong support for the tax credit program, calling it a “no brainer” and pointing out that billions of dollars could become available for students.

State leaders in New Hampshire, Florida, North Dakota, Indiana, Montana, Georgia, Mississippi, Idaho, Alabama, Arkansas, Iowa, Virginia, Louisiana, Texas, Colorado, South Dakota, Nebraska, and Tennessee have either opted into the program or expressed their intention to opt in.

If California declines to opt in, residents in California can send their money to SGOs in other states to take advantage of the tax credit. California leaders should opt in so that those contributions benefit students in California, rather than going to other states.

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

If your state does not opt in, you can still contribute to an SGO in your state as a charitable nonprofit tax deduction, but the contribution will not be eligible for the federal tax credit. You may also donate to an SGO eligible for the federal tax credit in another state that did opt into the program.