New $1,700 Tax Credit Coming Soon For Donations For Private Schools

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Taxpayers can soon take advantage of a new federal tax credit of up to $1,700 for donations to scholarship-granting organizations (SGOs) — nonprofit groups that use contributions to fund scholarships for students to attend qualified private schools of their choice.

The new credit is part of the One Big Beautiful Bill Act, signed into law by President Donald Trump on July 4. This credit becomes available for eligible donations made on or after Jan. 1, 2027.

“This is the first time the federal government is offering a dollar-for-dollar tax credit for charitable donations,” says Yisroel Kilstein, a certified public accountant and senior manager at Roth & Co. in Brooklyn.

One major caveat: States must opt into this tax break. If your state doesn’t opt in, then donations to an SGO in your state won’t qualify for this tax credit. But Kilstein notes that even if your state doesn’t participate, you may still be able to claim the credit for donations to SGOs in other participating states — provided the SGO is IRS-approved, uses funds in its home state and meets federal rules.

More than 138 million taxpayers may qualify for the credit in 2027, according to an analysis by the Institute on Taxation and Economic Policy (ITEP), a nonprofit, non-partisan tax policy organization. However, ITEP estimates less than half of eligible taxpayers will use it, due to lack of awareness about the tax credit, the paperwork involved in claiming it or an unwillingness to support private school vouchers. The new tax break could cost the government $8 billion to $101 billion a year, depending on how many taxpayers take advantage of it, according to ITEP’s rough estimates.

How the new tax credit will work

The new credit allows individuals who contribute to an SGO to claim a dollar-for-dollar credit on their federal tax return for the first $1,700 they donate to help cover the cost of K-12 private schooling. For married couples, the amount could possibly double to $3,400 for qualified contributions; however, that remains to be seen as the federal government has not issued guidance on the new tax credit yet.

Here’s a look at how the new tax credit will work:

• Participating states: Donations must be made to an SGO in a participating state. (States that are opposed to vouchers for private schools may choose not to enter the program.)
• Refundability: The credit will reduce your tax liability but will not generate a refund.
• No income limits: Taxpayers at any income level may claim the credit.
• No double-dipping: If you claim the credit, you cannot also itemize the same contribution on your Schedule A.
• Permanent benefit: Unlike some temporary provisions in the new tax law, this credit doesn’t expire (although future changes in federal law could alter or repeal it).
• Start date: The credit becomes available for donations made on or after Jan. 1, 2027.

The tax credit applies only to cash contributions. If a taxpayer donates non-cash assets, such as stocks, the donation won’t qualify for the credit. The taxpayer may still be eligible for a tax deduction for their charitable contribution, but for most taxpayers a deduction provides a lower benefit than a tax credit.

That’s because a tax deduction lowers your taxable income, but a tax credit decreases your tax liability dollar for dollar. For example, a $2,500 charitable deduction for a taxpayer in the 10 percent tax bracket would only reduce their tax liability by $250. If the same person owes taxes of $2,500, they may be able to reduce their bill by $1,700, ultimately only paying the IRS $800.

Which SGOs qualify

Before donating, taxpayers should confirm that the SGO meets IRS requirements to qualify for the credit. In order for an SGO to qualify, it must meet the following criteria:

• Must distribute at least 90 percent of its income for scholarships.
• Must award scholarships to at least 10 recipients who don’t all attend the same school.
• Must ensure recipients meet income requirements.
• Cannot earmark donations for specific students.

Since one of the requirements is that a state must opt in to the program, some contributions won’t qualify for the tax break. For this reason, taxpayers should check with the SGO to ensure the state has opted into the program.

How the program will operate

Contributions will be used to fund scholarships for qualifying children. SGOs distribute scholarship funds to cover eligible education expenses, similar to allowable costs covered by Coverdell education savings accounts.

Here is a list of expenses that may qualify:

• Tuition and fees
• Tutoring
• Special needs services
• Books and supplies
• Computers
• Room and board
• Transportation

Students may qualify if their household income is no more than 300 percent of their county’s median income. This is broader than earlier federal voucher programs, which were limited to lower-income families, allowing more households to qualify.

For example, a child from a household in Philadelphia and nearby counties may qualify for the scholarship with an income of up to $324,500, based on a four-person household.

Not only will the new program provide help to students, but qualified scholarships won’t be considered taxable income, Kilstein says. “The new law would allow scholarships to be excluded from the recipient’s gross income, providing added financial relief,” he says.

Moreover, he says it would serve as a gateway for more students to obtain scholarships to cover education-related costs. “Families will now have the choice to choose an educational environment that best suits their children’s needs, thus helping students who may not thrive in traditional public school settings access specialized education programs,” Kilstein says.