TL;DR
- EFTC is a federal tax credit; state scholarship tax credit programs are state-level. They’re independent of each other.
- Donors can typically participate in both, through separate donations or one larger gift. Under Treasury’s proposed rules a state credit on the same gift is subtracted before the $1,700 federal cap applies, and the combined benefit can’t exceed the gift.
- EFTC value is uniform nationally: up to $1,700 per taxpayer (up to $3,400 for a married couple filing jointly when each spouse gives), 5-year carryforward. State programs vary wildly in cap, credit percentage, and rules.
- For families: the two programs don’t conflict. You can apply for scholarships funded by either. A federal scholarship requires that the student live in a covered state.
- An SGO in a state program is not automatically a §25F SGO. It needs a spot on a covered state’s §25F list, a separate §25F account, and the federal operating tests.
- State credits exist independent of EFTC opt-in , a state can not opt in to EFTC but still have a strong state scholarship credit (and vice versa).
The basic difference
Both kinds of programs use the same general mechanism: a donor gives to a nonprofit Scholarship Granting Organization (SGO), and in exchange the donor reduces their tax bill. The difference is which government is paying for the credit:
- EFTC (the federal credit): Claimed against your federal income tax. The U.S. Treasury bears the cost. The credit is uniform across states.
- State scholarship tax credits: The credit is against your state income tax (or, in some cases, other state taxes). The state bears the cost. Each state designs its own program.
Side-by-side comparison
| Feature | EFTC (federal) | State programs |
|---|---|---|
| Tax level | Federal income tax | State income tax (varies) |
| Credit cap | $1,700 / taxpayer (spouses filing jointly count as two: up to $3,400 when each gives) | Varies widely ($500 to $1M+) |
| Credit percentage | 100% (dollar-for-dollar) | 50-100% depending on state |
| Refundable | No (5-year carryforward) | Varies; usually non-refundable |
| Aggregate cap | No nationwide cap | Most states have annual program caps |
| Available in | Donors in any state; scholarships only in opted-in (covered) states | ~20 states with their own programs |
| Who can give | Individuals, in cash, designated at the time of the gift. A partner’s or S-corp shareholder’s share of an entity’s gift doesn’t count. | Varies; some programs also credit business donors |
| Eligible students | Household income up to 300% of area median gross income, and the student must live in the covered state | State-specific income and demographic rules |
Can donors stack the two?
Yes, with one rule. §25F(b)(2) reduces the federal credit by any state credit allowed for your qualified (§25F-designated) contributions, so the combined benefit can’t exceed what you gave. Under Treasury’s proposed regulations (October 2026), which taxpayers may rely on for 2027 contributions, that reduction comes before the $1,700 cap: total your designated gifts, subtract the state credits allowed for them, then take the lesser of what remains or $1,700 (proposed § 1.25F-2(c)). Treasury explicitly rejected the cap-first reading, which would have cut the federal credit on a $2,500 gift with a $500 state credit to $1,200.
Three more details from the proposed rule. If one gift earns a state credit but you designated only part of it for §25F, the state credit is treated as coming first from the part you did not designate. A state credit you carry forward or back is counted in the year of the gift. And a state deduction, as opposed to a credit, doesn’t reduce the federal credit at all. You can also make two separate donations: one designated for §25F to an SGO on the IRS SGO list (claimed on your federal return) and another to a state-program-qualified organization (claimed on your state return). A state credit on dollars you didn’t designate for §25F doesn’t count against the federal credit.
Treasury’s own examples:
$2,500 designated, $500 state credit (preamble): $2,500 minus $500 leaves $2,000, above the cap, so the federal credit is the full $1,700. Total back: $2,200.
$2,000 designated, $400 state credit (Example 3): $1,600 remains, under the cap, so the federal credit is $1,600. Total back: $2,000, the size of the gift and no more.
$4,000 gift, $1,700 designated, $400 state credit on the whole gift (Example 4): the $400 is treated as coming from the $2,300 that wasn’t designated, so the federal credit is the full $1,700.
Live in a state with its own credit that hasn’t elected into §25F, such as Pennsylvania as of October 1, 2026? You can still claim the federal credit by giving to an SGO on any covered state’s list. Whether that same gift also earns your state credit is a question for your state’s program rules.
Read the full walkthrough in $2,200 back on a $2,500 gift. These are proposed rules: comments are due December 1, 2026, and the final regulations could change them.
What families should know
For families seeking scholarships, the two program types are independent paths, not competing options:
- You can apply for both if your state has both. The eligibility criteria differ; you might qualify for one and not the other, or for both. Under Treasury’s proposed rules, a §25F SGO must have systems to catch awards for the same expense that together exceed what the expense costs, so two scholarships can’t pay the same bill twice.
- Federal scholarships follow where the student lives. A §25F scholarship can go only to a student who resides in the covered state that lists the SGO. The school itself can be in another state. Household income must be at or below 300% of area median gross income (see who qualifies).
- State program scholarships often have longer track records , some have operated for over a decade, which can mean clearer application processes.
- EFTC may unlock scholarships in states that don’t have their own programs, expanding access to families who didn’t previously have a state-level option, as long as the state has opted in to the federal credit.
What donors should know
For donors, three considerations:
- Tax efficiency: EFTC’s 5-year carryforward and 100% credit make it efficient even for donors with modest federal liability. State programs vary, check your state’s rules.
- Where dollars go: You can give to an SGO on any covered state’s list, wherever you live, and the SGO funds students who reside in that state. State-program dollars stay in the state. Where you want your impact matters.
- Annual planning: Many state programs have application windows and statewide caps that fill up, so plan those gifts early. The federal credit has no nationwide cap; it runs on the calendar year, and the gift must be cash and designated as a §25F contribution when you make it (the designation can’t be undone). Keep the SGO’s written acknowledgment, due by January 31: it carries the donor number you’ll report on IRS Form 8525, which the IRS hasn’t released yet.
States with their own programs
About twenty states currently operate their own scholarship tax credit programs (Pennsylvania, Florida, Arizona, Georgia, Indiana, Iowa, Kansas, Louisiana, Nevada, New Hampshire, Oklahoma, Rhode Island, South Carolina, South Dakota, Virginia, and others). Each program has different rules around eligibility, cap, and credit percentage. The interaction with EFTC depends on whether the state has also opted in to EFTC, some have, some haven’t. A state that does elect must describe its own SGO tax credit to the IRS as part of the election, under Treasury’s temporary regulations.
For SGOs: state-qualified is not §25F-qualified
An organization approved under a state program doesn’t carry that status into the federal credit. To be a §25F SGO it must be a 501(c)(3) public charity on the §25F SGO list of a covered state where it is located, keep a separate §25F segregated account for designated gifts and their earnings, and meet the federal operating tests: 10 or more students not all at the same school, income verification against 300% of area median gross income, students who reside in the state, renewal and sibling priority, no earmarking, and the 90% spending test. Under Treasury’s proposed rules, an organization whose activities are at least 85% scholarship granting, with state-program scholarships counting toward that share, can apply the 90% test to its §25F account alone. Below 85%, the 90% test applies to every dollar the organization takes in. That line matters for this group: Treasury estimates that SGOs running state programs spent 78% of revenue on program-related costs on average in fiscal year 2024. See adding the federal layer to a state program and how the 85% safe harbor works.
For your state’s EFTC status, see the state-by-state status map. For your state’s state-level scholarship tax credit program, check your state department of revenue or local school-choice advocacy organizations.
Frequently asked questions
Can I donate to both a state scholarship tax credit program and EFTC?
Yes. Under Treasury's proposed regulations (October 2026), which taxpayers may rely on for 2027 contributions, a state credit claimed on your §25F-designated gift is subtracted from that gift first, and the $1,700 federal cap applies to what remains. A $2,500 gift that earns a $500 state credit leaves $2,000, so the federal credit is the full $1,700: $2,200 back in total. A smaller gift shrinks the federal credit: in Treasury's Example 3, $2,000 designated plus a $400 state credit leaves a $1,600 federal credit. If a state credit covers a gift you only partly designated for §25F, it is treated as coming first from the undesignated part (Treasury's Example 4). Two separate donations, one designated for §25F and one claimed only for the state credit, also work, because a state credit on dollars you did not designate doesn't count against the federal credit. What you can't do is get back more, combined, than you gave.
Which is more valuable: federal EFTC or state credits?
It depends on the state and the donor's situation. EFTC is uniformly a $1,700 federal credit per taxpayer nationally. Under Treasury's proposed regulations, spouses filing jointly are treated as separate taxpayers, so a couple can claim up to $3,400 on a joint return when each spouse makes and designates their own gift. State credits vary widely: some are dollar-for-dollar with high caps, others are partial credits with low caps, and many states have no scholarship credit at all. In a state with a strong program, the two can add up: Treasury's economic analysis describes a donor in a state with a 100% credit of up to $2,000 who gives $5,000 and designates $1,700 for §25F, then takes $2,000 off state tax and $1,700 off federal tax, $3,700 in all.
Will state credits go away because of EFTC?
No. EFTC is additive. State scholarship tax credit programs were enacted by individual states for state-level reasons and continue independently. EFTC doesn't preempt or replace them. Treasury wrote its proposed state-credit rule with that in mind: it says the reduction is meant to stop combined benefits from exceeding the gift, not to shrink the federal credit in states that already offer their own, which "would discourage those States from continuing to provide a State tax incentive."
If my state hasn't opted in to EFTC but has its own credit, can my family still use the state program?
Yes. State scholarship tax credit programs operate entirely under state law and are unaffected by whether the state has opted in to EFTC. Your family's eligibility for state-program scholarships is set by state rules, not federal. Federal EFTC scholarships work differently: under Treasury's proposed regulations, a §25F scholarship goes only to a student who lives in a covered state that lists the SGO. A student who lives in a state that hasn't opted in can't receive one, even at a school in a state that has (with narrow exceptions for military and Tribal families).
Can SGOs administer both state and federal scholarship programs?
Yes, and the same organization can run both in parallel. But a state-program SGO is not automatically a §25F SGO. It has to be on the §25F SGO list of a covered state where it is located, keep a separate §25F segregated account that holds only designated gifts and their earnings, and meet the federal operating tests. Under Treasury's proposed regulations, an organization whose activities are at least 85% scholarship granting (state-program scholarships count toward that) can apply the 90% spending test to its §25F account; below 85%, the 90% test applies to everything the organization takes in. For families and donors, a dual-program SGO is convenient: the same organization can be the conduit for state and federal scholarships.
