Section 25F Scholarship Tax Credit: Rules for 2027 Gifts

The section 25F scholarship tax credit gives an individual a nonrefundable credit of up to $1,700 a year for cash gifts to a scholarship granting organization (SGO). This post is for preparers who will field client questions before the first eligible gifts, which can be made on or after January 1, 2027.

Congress created the credit in section 70411 of the One Big Beautiful Bill Act (OBBBA), Public Law 119-21. On October 2, 2026, Treasury published T.D. 10057, temporary regulations at 91 FR 62655, and REG-117199-25, proposed regulations at 91 FR 62818. A gift earns nothing unless a State has opted in and listed the recipient. For 2027 the State election is due January 1, 2027 and the State list February 15, 2027, so a client may be ready to give before the recipient is listed. My post on effective dates versus applicability dates covers the dates of these two documents. This post covers the credit itself.

Key takeaways

• The limit is $1,700 per taxpayer. Proposed Treas. Reg. Section 1.25F-2(a)(2) treats spouses on a joint return as separate taxpayers, so a couple can reach $3,400 if each spouse gives.
• The credit is the lesser of qualified contributions reduced by State credits (not below zero) or $1,700.
• A gift counts only if the recipient is an SGO on a covered State's list and the donor designates it as qualified when giving. Under proposed Section 1.25F-2(b)(1), a donor may generally rely on the IRS SGO list at the time of the gift.
• A State must opt in each calendar year. For 2027 the advance election is due January 1, 2027 and the list February 15, 2027.
• Unused credit carries forward five years, and a gift that earns the credit cannot also be deducted under section 170.

What Is the Section 25F Scholarship Tax Credit?

The section 25F scholarship tax credit is a nonrefundable credit against income tax for an individual's cash contributions to an SGO, limited to $1,700 per taxpayer per year. Section 25F(a) allows it to a U.S. citizen or resident.

It applies to taxable years ending after December 31, 2026 under OBBBA section 70411(c)(1). T.D. 10057 adds that "Taxpayers may begin making qualified contributions on January 1, 2027." My reading is that a 2026 gift earns no credit, even for a fiscal-year individual whose taxable year ends after December 31, 2026, because no State list exists for 2026. Because the credit is nonrefundable, proposed Section 1.25F-2(d) caps it at the tax liability determined under section 26(a). I read the statute at Cornell's copy of 26 U.S.C. 25F.

Which Organizations Count as a Scholarship Granting Organization?

An organization is an SGO only if it is a section 501(c)(3) organization that is not a private foundation, keeps qualified contributions in separate accounts, meets the section 25F(d) operating rules, and is on a covered State's list for the year. A "covered State" is a State or the District of Columbia that elects to participate that year.

The operating rules in section 25F(d) include scholarships to 10 or more students who do not all attend the same school, and spending "not less than 90 percent of the income of the organization on scholarships for eligible students." An eligible student comes from a household with income not greater than 300 percent of area median gross income and is eligible to enroll in a public elementary or secondary school.

Residence does not limit the donor. Proposed Section 1.25F-2(a)(1) says a taxpayer "may make a qualified contribution to any SGO on any State SGO list, regardless of the taxpayer's State of residence." A State credit program is not enough. The T.D. 10057 preamble says a gift to an organization that qualifies for State credits but is not on a State SGO list "does not give rise to the section 25F credit."

What Counts as a Qualified Contribution?

A qualified contribution is a charitable contribution of cash to an SGO that the donor designates as qualified at the time of the gift. Under Temporary Treas. Reg. Section 1.25F-1T(a)(12) (repeated in proposed Section 1.25F-1(a)(12)), that designation, "once made, is irrevocable."

Cash means U.S. dollars by check, transfer or a similar method, not digital assets. Goods or services the SGO provides in return reduce the qualified amount.

Pass-through gifts do not count. Under proposed Section 1.25F-2(a)(3), a partner's share of a partnership's gift, or an S corporation shareholder's share, is not a qualified contribution "whether or not" it is deductible under section 170.

The SGO must send a written acknowledgement with a unique donor number by January 31 of the following year. Under proposed Section 1.25F-2(g), the taxpayer reports that number on Form 8525, and without it the proposed rule presumes no qualified contribution, subject to rebuttal.

How Does the $1,700 Limit Work for Married Couples?

Under the proposed regulations, a married couple filing jointly gets a separate $1,700 limit for each spouse, so the joint-return maximum is $3,400. The statute says only that the credit "shall not exceed $1,700" for "any taxpayer." The joint-return answer comes from Treasury's interpretation, in proposed Section 1.25F-2(a)(2), that spouses who file jointly "are treated as separate taxpayers." T.D. 10057 does not contain it, so it is only proposed.

Proposed Example 2 gives the numbers. Spouses B and C each contribute $2,000, all designated as qualified. Each gets a $1,700 credit, "resulting in a total of $3,400 that may be claimed on B and C's joint return," subject to their combined section 26(a) limit.

The regulation does not say how to attribute a gift paid from a joint account. That is my observation, not a rule, so I would document which spouse gave.

How Does the Credit Order Against a State Credit?

The section 25F credit is the lesser of two amounts: qualified contributions reduced, but not below zero, by State credits on those contributions, or $1,700. Section 25F(b)(2) reduces the federal credit by the State credit, and the statute lists the $1,700 limit first. Proposed Section 1.25F-2(c)(1) reduces first and caps second.

The preamble works an example. Capping first would limit a $2,500 gift with a $500 State credit to $1,200. Reducing first gives $2,500 minus $500, which is $2,000, and the lesser of $2,000 and $1,700 is a $1,700 federal credit. The $1,200 figure is the approach Treasury rejected. The $1,700 result is my arithmetic from the rule.

Designation also matters. In proposed Example 4, Taxpayer E gives $4,000, designates only $1,700 as qualified and claims a $400 State credit. Section 1.25F-2(c)(2) treats the State credit as allowed first against the $2,300 that was not designated, so E still gets $1,700. My inference is that how much to designate is a planning decision, and an irrevocable one. A State deduction, as opposed to a credit, generally does not reduce the federal credit.

Can the Same Gift Also Be Deducted Under Section 170?

No, to the extent the gift earns the credit. Section 25F(e) says a qualified contribution for which a credit is allowed "shall not be taken into account as a charitable contribution for purposes of section 170."

The portion that earns no credit may still be deductible. In proposed Example 1, a $2,000 gift earns a $1,700 credit and the remaining $300 may be deductible.

How Do States Opt In, and When?

A State opts in by election for a single calendar year, and for 2027 the advance election on Form 15714 is due January 1, 2027, with the State SGO list due February 15, 2027. Temporary Treas. Reg. Section 1.25F-5T(c)(3)(i)(B)(1) sets the first date and (c)(3)(ii)(B) the second, and proposed Section 1.25F-5 repeats them. Both say "For calendar year 2027 only."

The Governor, or another individual, agency or entity State law designates, makes the election (Section 1.25F-5T(c)(2)). If the State does not perfect the advance election in time, no organization in that State qualifies as an SGO for the year (Section 1.25F-5T(c)(3)(ii)(C)).

Proposed Section 1.25F-2(b)(1) lets a donor rely on the IRS SGO list "at the time a contribution is made." My reading is that the client should give after the recipient appears on that list.

What Happens to Credit You Cannot Use This Year?

Unused credit carries to the next taxable year, but not to any year "following the fifth taxable year after the taxable year in which the credit arose." Section 25F(f)(2) sets that limit.

Here is an illustration of my own. A couple gives $1,700 each in 2027, for $3,400 of credit, but owes $2,000 after other credits. They use $2,000 and carry $1,400 forward. For a 2027 credit the last year is 2032, and Example 5 shows the 2027 carryforward "has expired" by 2033.

What Should a Preparer Do Before the First Gift?

Before the first gift, confirm the recipient is listed, document the designation, and model any State credit. Comments on REG-117199-25 are due December 1, 2026, and the hearing is December 15, 2026. The proposal may change, and reliance for 2027 gifts carries conditions I covered in the dates post. For each client:

• Do not claim any credit for a 2026 gift.
• Confirm the recipient is on the IRS SGO list before the gift.
• Document the designation in writing at the time of the gift. The regulation requires designation at the time of the gift; writing it down is my recommendation.
• Model any State credit, because it reduces the federal credit.
• Collect the SGO acknowledgement and unique donor number for Form 8525.
• Write the tax year and the proposed status into the memo. How to write a tax research memo covers the structure.

When I research a provision this new in Tax Orator, I check each citation against the Federal Register.

Frequently Asked Questions

Can a client claim the section 25F credit for a 2026 gift? No. T.D. 10057 says taxpayers may begin making qualified contributions on January 1, 2027, and no State list exists for 2026. I read that to cover a fiscal-year individual too.

Can spouses claim $3,400 on a joint return? Under proposed Section 1.25F-2(a)(2) and Example 2, yes, if each spouse's qualified contribution, after any State credit, is at least $1,700. That rule is still proposed.