New Federal Tax Credit for Scholarships: What You Need to Know About the 2025 Bill

On July 3, 2025, Congress passed House Bill 1, formerly known as the One Big Beautiful Bill Act, creating a new opportunity for taxpayers who want to support education and receive a dollar-for-dollar tax benefit. Included in the legislation is Section 70411, which can be found here, which establishes a federal tax credit for donations to Scholarship Granting Organizations (SGOs), a program modeled closely after Pennsylvania’s Educational Improvement Tax Credit (EITC) program.

This new provision will take effect in 2027 and is poised to reshape how individuals and businesses support private education through charitable giving. Here’s what you need to know.

What Is the New Federal Education Tax Credit?

Starting in 2027, taxpayers will be able to claim a non-refundable federal tax credit of up to $1,700 per year for donations to approved SGOs.

A tax credit is a dollar-for-dollar reduction of your federal tax bill.  That means, if I donate one dollar in this program, my federal taxes will be reduced by one dollar.

An SGO under the Act functions similarly to a scholarship organization under Pennsylvania’s EITC program: a nonprofit entity that distributes funds to help families pay for qualified educational expenses.

How the Federal Education Tax Credit Works?

The newly passed federal tax credit offers a strong incentive for taxpayers who want to support private K–12 education. Here’s how it works:

• Dollar-for-dollar tax credit: When you make a donation to an approved SGO, you receive a nonrefundable federal tax credit equal to the full amount of your donation—up to the annual limit.
• Annual limit: The credit is capped at $1,700 per taxpayer per year.  This is a fixed dollar amount—not a percentage of adjusted gross income (AGI), as originally proposed.

This structure allows donors to make a meaningful impact on education while receiving a full tax benefit in return—at no net cost.

Can I Use Appreciated Assets if I Donate to an SGO?

A notable provision that was removed from the final version of the federal bill was the capital gains tax exclusion. Earlier versions of the legislation would have allowed donors to receive an additional tax benefit by contributing appreciated assets, such as publicly traded stock, to approved Scholarship Granting Organizations (SGOs). Donors could have avoided paying capital gains tax on the appreciation of those assets—providing a powerful incentive for non-cash charitable giving. However, this benefit was ultimately excluded from the final law.

As written, the federal tax credit only applies to cash contributions, not to contributions of appreciated assets. If you donate stock or other appreciated property to an approved SGO, you would not receive the federal tax credit. However, you may still be eligible to claim a charitable deduction for the fair market value of the asset.

A deduction is different from a tax credit. While a credit directly reduces your tax bill dollar-for-dollar, a deduction reduces your taxable income, which in turn lowers the amount of income subject to tax. For example, a $10,000 charitable deduction for someone in the 35% tax bracket would reduce their tax liability by $3,500.

Pennsylvania’s EITC program does permit donations of appreciated stock, and this remains a smart strategy for those looking to avoid capital gains tax and receive a state tax credit. For donors looking to maximize both federal and state tax benefits, combining cash donations (to claim the federal credit) with stock donations (to take advantage of state-level benefits and capital gains planning) may offer the best results.  It is still a bit early to tell as we are awaiting guidance from the IRS and Pennsylvania Department of Revenue.

Key Features of the New Tax Credit

• Dollar-for-dollar federal tax credit – your donation costs you nothing.
• $1,700 limit per taxpayer.  At present, we are unsure if that means joint filers can double the tax credit.
• Eligible uses include:
  • Tuition and fees
  • Required books, supplies, and equipment
  • Academic tutoring
  • Special needs services
  • Room and board, uniforms, transportation, and other required items

Income Limits for Beneficiaries

Families with adjusted gross income (AGI) up to 300% of Area Median Income (AMI) are eligible to receive scholarship support.

Examples:

• In Philadelphia and nearby counties: up to $324,500
• In Allegheny County and nearby counties: up to $310,800

This is nearly double the income limit for Pennsylvania’s current EITC program. However, the interaction between the state and federal income thresholds still requires clarification.

Interaction With Pennsylvania’s EITC Program

Pennsylvania currently offers:

• 75% state tax credit for one-year commitments to the state
• 90% credit for two-year commitments or for donors using Special Purpose Entities (SPEs)

Under this structure, donors often receive federal deductions for the small, non-credited portion of their donation, making the net out-of-pocket cost as little as six to ten cents on the dollar.

However, the federal bill includes a reduction clause:

“The amount allowed as a credit… shall be reduced by the amount allowed as a credit on any State tax return…”

This suggests the federal credit will replace the federal deduction for EITC gifts. Until the IRS issues guidance, the safest assumption is:

• No double-dipping on the state credit and a federal deduction.
• Donors may still be able to give larger amounts effectively at no cost.

For example, a family earning $300,000 could give $12,400 across state and federal programs and have it fully offset by credits.

Pennsylvania will need to opt into the federal program and may need to adjust its eligibility requirements to align with the new law.

We will know more once the final federal regulations are issued.

What About Donors in Other States?

If you live in a state that does not have an EITC-style program, the new federal tax credit creates an opportunity to make gifts to approved SGOs and receive a dollar-for-dollar credit. These organizations can support students attending private or parochial schools of your choice.

Employer and Corporate Participation

Employers can help scale this program by setting up payroll contribution options. Through a simple opt-in, employees could direct a portion of their paycheck to a partner SGO. Because the tax credit offsets the entire amount, employees would see no financial downside.

Example: A company with 100 employees could help redirect millions of dollars to local schools — at no cost to the employees.

Other Tax Law Changes: Impact on EITC Giving

The Act also increases the cap on state and local tax (SALT) deductions:

• From $10,000 to $40,000
• Phased out for incomes between $500,000 and $600,000

This change benefits some high earners. However, for those with income over $600,000, the deduction fully phases out. This may reduce the value of EITC giving for some, especially if EITC gifts become non-deductible while regular state tax payments remain deductible.

The IRS previously issued a safe harbor in 2018 allowing corporations to deduct charitable contributions even when receiving state tax credits. A similar safe harbor be issued for individuals impacted by the changes to the SALT deductions.

Final Thoughts

The new federal scholarship tax credit has the potential to transform education funding and charitable giving. It builds on successful models like Pennsylvania’s EITC program, expanding both donor access and student eligibility.

Stay tuned:

• IRS guidance and state opt-in decisions will shape the program’s final implementation.
• For donors in Pennsylvania and other EITC states, strategy and planning may need to evolve.

As of now, we are still awaiting formal guidance from the U.S. Treasury and the IRS. This blog is intended as a preliminary overview based on the language of the legislation and what we believe the program may look like once implemented. Final details, including how the federal tax credit will interact with existing state programs like Pennsylvania’s EITC, will become clearer once regulations are issued and official interpretations are released.

We will continue to monitor developments closely and update you as more information becomes available.

Support Education with Your Tax Dollars

If you’re interested in redirecting your Pennsylvania tax dollars to support innovative K–12 education or private schools, contact Friends of Education at info@pataxcredits.org.

Friends of Education has helped raise $37 million through Pennsylvania’s Educational Improvement Tax Credit (EITC) program, benefiting both scholarship organizations and educational improvement organizations across the Commonwealth.

We make the EITC process simple, effective, and strategic, helping donors maximize their philanthropic impact while leveraging available tax benefits.

Friends of Education will also keep you informed about developments in the new federal scholarship tax credit, set to launch in 2027.