Tax Credit Scholarship FAQ: Everything Donors, Families and SGOs Need to Know

Tax credit scholarship programs represent one of the fastest-growing education initiatives in the United States. With the recent passage of the Educational Choice for Children Act, which created the Education Freedom Tax Credit (EFTC), families now have access to both state and federal funding options for K-12 education. Below are answers to the most common questions about how tax credit scholarships work.

Q: What is a tax credit scholarship?

A tax credit scholarship is a financial aid program funded by private donations rather than government appropriations. Individuals and businesses donate to nonprofit Scholarship Granting Organizations (SGOs), which then award scholarships to eligible students. In return for their contribution, donors receive a tax credit that reduces their state or federal income tax liability dollar-for-dollar.

Q: How is a tax credit different from a tax deduction?

A tax credit is significantly more valuable than a tax deduction. A deduction reduces your taxable income, while a credit reduces your actual tax bill. For example, if you donate $1,000 and receive a tax credit, your tax liability decreases by the full $1,000. If you received a deduction instead, your benefit would only be the amount of taxes you would have paid on that $1,000 of income.

Q: What is the Education Freedom Tax Credit and how does it relate to tax credit scholarships?

The Educational Choice for Children Act (ECCA), signed into law on July 4, 2025, created the nation's first federal Education Freedom Tax Credit. This program operates similarly to state tax credit scholarship programs but provides a federal tax credit for donations made to qualified SGOs. The Education Freedom Tax Credit allows individual taxpayers to claim up to $1,700 per year in federal tax credits for contributions to scholarship organizations.

Q: Who is eligible to receive scholarships?

Eligibility requirements vary by program, but most tax credit scholarships target students from low to middle-income families. Under the federal program, students must live in households earning at or below 300% of their area's median gross income and must be eligible to enroll in a public K-12 school. Many SGOs may also give priority to students who received scholarships in previous years and their siblings.

Q: What can scholarship funds be used for?

Tax credit scholarships typically cover a wide range of educational expenses. Common eligible uses include tuition and fees at private or religious schools, curriculum and textbooks, online educational materials and technology, tutoring services, dual-enrollment courses, and educational therapies for students with disabilities such as occupational therapy, physical therapy, behavioral therapy, and speech-language therapy. Some programs also support homeschooling expenses and microschool tuition.

Q: Can I claim both state and federal tax credits?

Yes, in most cases. If your state offers a tax credit scholarship program and you also donate to a qualified SGO, you can receive both credits by making separate contributions to each program. However, if you donate to an organization that accepts contributions for both state and federal programs, you cannot "double-dip" on the same donation. The federal credit is reduced by any state credit received for the same contribution.

Q: Are corporations eligible for the Education Freedom Tax Credit?

No. This tax credit is only available to individual taxpayers. However, many state tax credit scholarship programs do offer credits to businesses, so corporations can still support school choice through state-level programs where available.

Q: Is there a cap on how many credits can be issued?

This depends on the program. The federal program has no cap on credits issued, making it a permanent and uncapped provision in the tax code. 

State programs vary widely. Some have annual caps that can be reached quickly, while others have much higher or no caps at all.

Q: What happens if I can't use my entire credit in one year?

Under the federal policy, unused credits can be carried forward for up to five years. This means if your tax credit exceeds your tax liability in the year you make the donation, you can apply the remaining credit to future tax years. 

State programs have different rules, with some allowing carryforwards and others requiring the credit to be used in a single year.

Q: How do I donate to receive a tax credit?

To receive a tax credit, you must donate to a qualified SGO. For the federal Education Freedom Tax Credit, your state must have opted into the program and designated eligible SGOs. You can find lists of participating organizations through state education agencies or school choice advocacy groups. 

Donations must be made in cash and cannot be earmarked for a specific student or family.

Q: Will my child automatically get a scholarship if I donate?

No. Donations to SGOs cannot be earmarked for specific students, including your own children. This ensures the program remains a charitable scholarship initiative rather than a tuition payment mechanism. SGOs award scholarships based on eligibility criteria and application processes that comply with program rules.

Q: Do scholarships count as taxable income?

Under the federal program, scholarships received for qualified K-12 education expenses are not taxable income for the student or parent. This exclusion applies to amounts received after December 31, 2026.

Q: What is the difference between a Scholarship Granting Organization and a school?

An SGO is a 501(c)(3) nonprofit organization that receives donations, manages applications, verifies student eligibility, and distributes scholarship funds to families or schools. The SGO is not a school itself.

Schools accept scholarship students and receive tuition payments either directly from families or through the SGO.

Q: What are the requirements to operate an SGO?

SGOs must be 501(c)(3) public charities and cannot be private foundations. Under the Education Freedom Tax Credit, SGOs must award scholarships to at least 10 students attending more than one school, use at least 90% of contributions for scholarships, verify family income and student eligibility, maintain separate accounts for the federal program funds, and file annual reports with the IRS and Department of the Treasury. Additional state requirements may apply for state programs.

For existing SGOs wondering how to scale for the federal program while maintaining a state program, see our guide on how existing SGOs can prepare for FSTC.

Q: Is the federal Education Freedom Tax Credit program available in every state?

Not automatically. States must opt in by authorizing SGOs to participate and submitting a list of eligible organizations to the IRS. Governors are responsible for certifying participation. 

If your state has not opted in, scholarships cannot be distributed there, although taxpayers can still claim the federal credit by donating to SGOs in participating states.

Q: How can I encourage my state to participate?

Contact your governor's office and state legislators to express support for the federal program. Many advocacy organizations, like Yes. Every Kid. provide templates and talking points to help constituents communicate the benefits of opting in.

Q: Does this take money away from public schools?

Tax credit scholarships are funded by private donations that generate tax credits, not direct government appropriations.

In fact, SGO funds raised through the Education Freedom Tax Credit can be used for public, private, charter and in some cases, home school programs.

Q: How do I apply for a scholarship for my child?

Applications are submitted directly to SGOs, not to schools or government agencies. Each SGO sets its own application timeline, required documentation, and selection criteria within the bounds of program rules. 

Families typically need to provide proof of income, student eligibility information, and details about intended educational expenses. Many SGOs offer support throughout the application process.

Q: Can scholarships be used at religious schools?

Yes. Tax credit scholarships can be used at religious schools, and many families choose faith-based education specifically because these programs make it affordable. The U.S. Supreme Court has upheld the constitutionality of tax credit scholarships that include religious schools as eligible options.

Q: What makes the Education Freedom Tax Credit program different from other school choice programs?

This is unique because it operates at the federal level while preserving state flexibility and parental choice. Unlike voucher programs funded through government appropriations, tax credit scholarships are funded by voluntary private donations. 

The program is permanent and uncapped, provides credits that can be carried forward for five years, and can be layered with state programs to maximize family benefits.

Conclusion

Tax credit scholarship programs continue to expand access to educational opportunities across the country. Whether you're a parent exploring options for your child, a donor looking to support education, or an organization considering launching an SGO, understanding how these programs work is the first step toward making school choice a reality for more families.