Tax Credit Scholarships Explained: Expanding Educational Opportunities

Tax credit scholarships represent a growing trend in education choice, offering a unique approach to funding private education. These programs incentivize individuals and businesses to contribute to nonprofit organizations that award private school scholarships to eligible students. Unlike traditional voucher programs, tax credit scholarships leverage private donations, making them an increasingly popular option.

The Basics of Tax Credit Scholarships

In the United States, scholarship tax credits, also called tax credit scholarships, education tax credits, or tuition tax credits, are a form of school choice that allows individuals or corporations to receive a tax credit from state taxes against donations made to non-profit organizations that grant private school scholarships.

Tax-credit scholarships are different from other school choice programs, such as school vouchers, in the way they are funded and the allowed use of the money. Traditional tax-credit scholarships provide families with funds to spend on private school tuition.

Here's how they generally work:

Donations to Scholarship Granting Organizations (SGOs): Individuals and corporations donate to SGOs, which are nonprofit organizations.
Tax Credits for Donors: In return for their contributions, donors receive a tax credit, reducing their state tax liability. The amount of the credit varies by state.
Scholarships for Students: The SGOs use the donations to fund scholarships for eligible students to attend private schools.

Key Features of Tax Credit Scholarship Programs

Tax credit scholarship programs come in various forms, but some key features are commonly included.

Donor Eligibility

The criteria a taxpayer must meet to be eligible to receive a tax credit in return for a donation to a scholarship organization. Some states limit the credits to individual taxpayers, while others limit credits to corporate donations. Ideally, any individual or corporate taxpayer who donates to a scholarship organization should be able to claim a dollar-for-dollar credit.

Student Eligibility

The criteria that a student must meet to be eligible to receive a scholarship. Scholarship should be restricted to families below a certain income threshold, since STCs are intended to serve families who do not sufficiently benefit from personal-use education tax credits (ETCs). The income eligibility cut-off should be high enough to allow middle-income families to participate since the personal-use ETCs may not sufficiently cover the cost of a child’s education. States may limit scholarships to students who had previously attended a public school or to students with disabilities. Some states may require that a scholarship recipient has previously attended a public school and may further stipulate that the public school they attended met certain criteria. Some state tax credit scholarship programs only provide scholarships to students with disabilities.

Credit Value

The percentage of donations eligible for tax credits. These range from 50 percent to 100 percent in existing programs. Ideally, any individual or corporate taxpayer who donates to a scholarship organization should be able to claim a dollar-for-dollar credit.

Total Credit Cap

The total amount of tax credits available for eligible donors to claim in a given year. Ideally, states would not limit participation in STC programs through such caps, but policymakers sometimes view the cap as a fiscal (or political) necessity.

Credit Cap Escalator

The amount that the total credit cap increases each year, if at all. In some states, the escalator is triggered only when the total credits claimed in the previous year reach a certain percentage of the total credit cap.

Read also: Redstone Scholarship Opportunities

Donation Cap

The maximum amount that an individual or corporate taxpayer can donate. Sometimes these caps are a percentage of the taxpayer’s tax liability, other times they are a fixed amount for all taxpayers.

Scholarship Cap

The maximum amount of money that a scholarship organization can disburse to each scholarship recipient. New Hampshire mandates a maximum average scholarship size, which gives scholarship organizations more flexibility while ensuring that the tax credits are fiscally neutral or save money.

Scholarship Usage

Scholarship recipients should be able to use the funds for a wide range of education-related expenses, including tuition, tutoring, textbooks, educational materials, homeschooling curricula, online courses, and more. As with personal-use ETCs, flexibility in spending is crucial to the effective operation of the market. Granting parents broad discretion in their educational spending will foster innovation in educational services as entrepreneurs seek new ways of providing value to families. By contrast, limiting the credits to private school tuition or textbooks would enshrine the existing system of education. States allow funds to be used for private school tuition. Some states may extend this to include other private school expenses, such as school fees.

SGO Requirements

States may require SGOs to award a certain percentage (e.g., 95%) of the donations they receive as scholarships. States may require private schools to be accredited or hold state approval, or to follow federal or state nondiscrimination requirements.

A Look at State Programs

As of July 2015, 16 states have enacted 20 STC programs. The oldest of these is Arizona’s individual-donor tax credit, enacted in 1997. Montana and Nevada were the two most recent states to enact a scholarship tax credit. The programs vary in size and design from state to state.

Twenty-one states currently have tax-credit scholarship programs, according to Education Week’s private school choice tracker, making it the most common form of private school choice program.Arizona and Florida established the first tax-credit scholarship programs, which each continue to enroll more students than any other tax-credit scholarship programs nationwide. In some states-including Kansas, Nevada, and Rhode Island-they’re the only form of private school choice the state offers parents. Arizona established its Original Individual Tax Credit Scholarship program in 1997, two decades before the post-pandemic surge in education savings account programs that is still in progress in conservative-led states.

Here's a closer look at a few key states:

Arizona: Arizona established its Original Individual Tax Credit Scholarship program in 1997. In 2011, the Supreme Court upheld Arizona's Personal Tax Credits for School Tuition Organizations program in Arizona Christian School Tuition Organization v. Winn. The Court ruled that tax credits are not a form of government spending, and that donations to scholarship organizations are voluntary.
Florida: To expand educational opportunities for children of families that have limited financial resources and to enable children in this state to achieve a greater level of excellence in their education, the Florida Legislature created the Florida Tax Credit Scholarship Program in 2001. As of the 2023-24 school year, financial eligibility restrictions for FTC have been eliminated. Florida and Missouri have tax-credit education savings account programs.

The Federal Tax Credit Scholarship Program

On July 4, 2025, the FY2025 reconciliation act (P.L. 119-21), commonly referred to as the One Big Beautiful Bill Act, was signed into law. The law includes a federally funded tax credit scholarship program for elementary and secondary education (hereinafter referred to as a tax credit scholarship program) that will take effect in calendar year 2027. Prior to the enactment of P.L. 119-21, no such program existed at the federal level.

The program will be administered by the Secretary of the Treasury (hereinafter referred to as the Secretary). Each of the 50 states and the District of Columbia (hereinafter referred to as states) will have the option of participating in the program.

Key Provisions of the Federal Program

Tax Credit for Individuals: P.L. 119-21 created a nonrefundable tax credit (hereinafter the scholarship contribution tax credit) worth 100% of the value of a taxpayer's qualified contribution-up to $1,700 per year, regardless of filing status-to a qualified SGO starting in tax year 2027 (meaning taxpayers will receive the credit when filing taxes in 2028).
Qualified Contribution: To qualify for the credit, a contribution must be given to an SGO that will use it to award scholarships to students located in the state in which the organization operates. SGOs will still be able to provide scholarships to students located in different states, but they may not use money from tax credit-supported contributions to do so.
No Double Dipping: Taxpayers will not be allowed to claim both the scholarship contribution tax credit and the itemized deduction for charitable contributions for the same donation. The value of the federal scholarship contribution tax credit will also be reduced (but not below $0) by the value of any state tax credit received for the same donation. Additionally, qualified contributions must be made in cash.
State Participation: Governors (or other individuals, agencies, or entities specified in state law) are responsible for preparing lists of SGOs within their states and remitting the lists to the Secretary of the Treasury. Participation in the program is voluntary. Residents of nonparticipating states will still be eligible to receive tax credits for contributions to SGOs in other states. However, an SGO will not be able to provide federal tax credit-supported scholarships to residents of states other than those in which the SGO is recognized, meaning families in nonparticipating states will not be eligible to receive such scholarships.
Student Eligibility: The program will limit scholarship eligibility to students who are (1) members of a household with an income that is not greater than 300% of the area median gross income and (2) eligible to enroll in a public elementary or secondary school.
Tax-Free Scholarships: In addition to creating the new tax credit, P.L. 119-21 also explicitly excludes scholarships provided under the tax credit program from federal income taxation, under a new Internal Revenue Code Section 139K. This exclusion will be effective for scholarships received in 2027 and thereafter.

Requirements for SGOs under the Federal Program

Statutory language limits what institutions can be considered qualified SGOs. State governments that elect to participate in the tax credit scholarship program are required to verify that SGOs meet the requirements listed in statute. To qualify, an SGO must be a 501(c)(3) nonprofit organization but may not be a private foundation.

The program will also require SGOs to prevent comingling of assets used to finance scholarships with other assets, such as those used for administrative expenses. An SGO must also be included on the annual list of eligible SGOs submitted each applicable year by the state in which the SGO is located. In addition, an SGO must spend at least 90% of its income on scholarships for eligible students.

All SGOs are required to give priority in granting scholarships to eligible students who were awarded a scholarship the previous year. After making these awards, SGOs are required to give priority to eligible students with a sibling who was awarded a scholarship from the same organization.

Advantages and Disadvantages of Tax Credit Scholarship Programs

Like any school choice initiative, tax credit scholarships have their supporters and critics.

Advantages

Expanded Educational Opportunities: Tax credit scholarships provide families with limited financial resources the opportunity to choose private education for their children.
Financial Savings for States: Advocates argue these programs represent a net positive for states because the state doesn’t have to pay the full per-pupil amount afforded to public schools when students switch to private schools on tax-credit scholarships.
Increased Competition and Improved Outcomes: One study found small positive effects on reading and math scores for public school students in Florida after the arrival of tax-credit scholarships introduced more competition into the education landscape there. Another found that students who attended Florida private schools using a tax-credit scholarship were more likely to graduate, and to enroll in Florida colleges, than their public school counterparts.

Disadvantages

Potential Loopholes and Manipulation: Some researchers have pointed out loopholes that allow individuals and corporations to generate a personal profit from the existence of these programs.
Lack of Transparency: States don’t make it easy to find out how many students on tax-credit scholarships are “switchers” from public schools and how many have been in private school the whole time and would have been even without the scholarship made possible by state-funded tax credits to donors.
Diversion of Funds from Public Education: Critics argue that these programs divert funds from public education, potentially harming public schools.

The Future of Tax Credit Scholarships

Longtime observers of the private school choice movement believe the push for tax-credit scholarships is waning, in favor of a bigger focus on vouchers and ESAs. The latter offer more money to families and more flexibility on how they can be spent.

Even so, federal lawmakers haven’t completely lost interest. The House Ways and Means Committee recently advanced a proposal to offer federal tax credits nationwide for donors to scholarship-granting organizations that support private school students.

Tax-credit scholarships are among the fastest growing education choice programs. These programs incentivize individuals and businesses to donate to nonprofit organizations that provide private school scholarships to eligible students.

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