How donors claim the $1,700 scholarship tax credit: rules, carryforward and examples

What the credit is

The EFTC tax credit is a federal income tax credit of up to $1,700 per taxpayer per year. You claim it on your federal tax return (Form 1040, with Form 8525) for the year in which you made a qualifying donation to a Scholarship Granting Organization. The credit reduces your federal income tax dollar-for-dollar, meaning a $1,700 donation translates into a $1,700 reduction in what you owe the IRS, subject to the cap and the non-refundable rule.

The credit is for individuals who are U.S. citizens or residents. A part-year resident counts only the gifts made while a citizen or resident. The details below come from two sets of rules Treasury and the IRS released on October 1, 2026: temporary regulations that are binding rules, applying from September 1, 2026 (they define a qualified cash contribution and set the SGO acknowledgment and reporting rules) and proposed regulations that cover how the credit itself is calculated. The proposed rules are not final, but Treasury says taxpayers may rely on them for contributions made on or after January 1, 2027.

Non-refundable, explained

“Non-refundable” means the credit can reduce your federal income tax liability to zero, but no further. If your tax bill before the credit is $1,000 and you donate $1,700 to an SGO, your credit zeroes out the $1,000 you owed, but you don’t receive a $700 refund for the unused portion. That $700 carries forward instead (see below).

This is different from a refundable credit (like the Earned Income Tax Credit), which can produce a refund even when the credit exceeds tax owed. Most taxpayers with steady income owe enough federal tax that they can use the full $1,700 credit; lower-income filers should check whether their pre-credit tax bill is high enough to absorb it. Under Treasury’s proposed regulations, the bill that matters is your tax after certain other nonrefundable personal credits are taken, including the child tax credit, the child and dependent care credit and the education credits (the credits under §§21, 22, 24, 25, 25A, 25B, 25C and 25E).

One common point of confusion: “non-refundable” does not mean you’re shut out if you normally get a tax refund. A refund just means your paycheck withholding exceeded your tax bill, you still owed tax, and the credit reduces it. If your liability is $15,000 and you over-withheld into a $5,000 refund, a $1,700 credit simply makes that refund $6,700. “Non-refundable” only means the credit can’t take your liability below zero; it has nothing to do with whether your year ends in a refund or a balance due.

How to claim it

1. Donate to a qualifying SGO on or after January 1, 2027. The SGO must be on the SGO list of a participating state, which can be any participating state, not only yours. The IRS will publish the combined IRS SGO list on irs.gov, organized by state; check it before you give. Under the proposed regulations you may rely on an organization being on that list (and not shown as removed) when you give, unless you knew it did not qualify or were involved in, or aware of, the problem that later got it removed.
2. Designate the gift when you make it. Tell the SGO at the time of the gift that it is a §25F qualified contribution. Under the temporary regulations that designation is irrevocable, and it can cover all or only part of a gift. If the SGO is listed in more than one state, it must let you choose how your gift is split among those states. Married couples aiming for $3,400 should each give and designate their own gift.
3. Receive a written acknowledgment from the SGO by January 31 of the following year, showing the SGO’s EIN, your total designated contributions for the year, your unique donor number, and whether you received any goods or services in return (with a description and good-faith value; that value comes off your qualified contribution). You don’t give the SGO your Social Security number. Under the temporary regulations Treasury issued October 1, 2026, the SGO also reports your name, address and total to the IRS by February 28. (SGOs running on purpose-built platforms like SGO HQ generate this §25F receipt automatically.)
4. Claim the credit on your federal tax return for the year of the donation, on Form 8525, Federal Scholarship Tax Credit, entering each SGO’s donor number. If you leave a donor number off, the IRS presumes you made no qualified contribution to that SGO, though the SGO’s acknowledgment can rebut that. The proposed regulations name the form, but the IRS has not yet released the form itself or its instructions.
5. Keep your records, including each SGO’s acknowledgment, for at least three years (the standard IRS audit window).

What counts as a qualifying donation

EFTC only accepts cash. The enacted statute (§25F(c)) defines a qualified contribution as “a charitable contribution of cash to a scholarship granting organization.” Treasury’s temporary regulations, which are binding rules, add two conditions: the gift must come from an individual, and it counts only to the extent you designate it to the SGO, when you make it, as a §25F qualified contribution. The value of any goods or services the SGO gives you in return is subtracted.

• Qualifies: physical currency, check, money order, electronic transfer (including credit or debit card), after-tax payroll deduction, or a similar method, all in U.S. dollars.
• Does NOT qualify: marketable securities (stocks, bonds, ETFs), real estate, cryptocurrency, services, time, or any other property. The temporary regulations expressly exclude digital assets from “cash.” Earlier draft versions of the bill (H.R. 833) allowed stock donations, but that provision was removed during budget reconciliation to prevent capital-gains tax-shelter abuse. Many older online articles still describe stock donations, those describe the pre-enactment bill, not the law.
• Does NOT qualify: donations to organizations not on a participating state’s designated SGO list.
• Does NOT qualify: your share of a gift made by a partnership or S corporation (including an LLC taxed as one). Under the proposed regulations that share doesn’t count even if it is deductible to you. To claim the credit, give as an individual.
• Does NOT qualify: a gift you did not designate as a §25F contribution when you made it. The designation can’t be added later, and once made it can’t be withdrawn.
• Does NOT qualify: donations earmarked for a specific student or family. SGOs decide who gets scholarships independently; donors cannot designate recipients. Choosing a school is a different question: the statute only bars student-level earmarking, and many SGOs let donors direct a gift toward a specific school’s scholarship fund (the SGO still makes every award decision). Treasury’s proposed regulations repeat the student-level bar and do not address gifts directed to a school. See designating your gift to a school for the full analysis.

Tax credit vs. charitable deduction

A common point of confusion: a tax credit is far more valuable than a charitable deduction.

• Charitable deduction: Reduces your taxable income. A $1,700 deduction in the 24% bracket reduces your tax by $408.
• Tax credit: Reduces your tax bill dollar-for-dollar. A $1,700 EFTC credit reduces your tax by $1,700.

Worked examples

Example 1: A donor with sufficient tax liability

Sarah is a single filer with $80,000 in federal income tax owed for 2027. She donates $1,700 to a qualifying SGO in October 2027. She claims the full $1,700 EFTC credit on her 2027 return; her federal tax bill drops from $80,000 to $78,300. Her out-of-pocket cost for the donation: $0.

Example 2: A donor who normally gets a refund

Priya’s federal income tax liability for 2027 is $15,000, but her employer withheld $20,000 from her paychecks, so without doing anything she’d receive a $5,000 refund. She donates $1,700 to a qualifying SGO. The credit reduces her liability from $15,000 to $13,300, and because her withholding is unchanged, her refund grows from $5,000 to $6,700. A year-end refund does not disqualify anyone: the credit applies to the tax you owe on your income, not to your refund or to any balance due at filing. Whether the $1,700 shows up as a bigger refund or a smaller bill depends only on your withholding, the benefit is identical either way. Priya doesn’t even have to wait for that bigger refund: adjusting her Form W-4 lets her take the $1,700 in her paychecks across 2027 instead of lending it to the IRS until she files.

Example 3: A donor with low tax liability (with carryforward)

Marcus is a retiree with $1,200 in federal income tax owed for 2027. He donates $1,700 to a qualifying SGO. He claims $1,200 of credit on his 2027 return (zeroing out his tax). The remaining $500 of credit carries forward to 2028, where it can offset future federal tax liability. As long as Marcus owes at least $500 of federal tax in total over the next five years, none of the credit is lost.

Example 4: A married couple filing jointly

Jamie and Alex file jointly. In 2027 Jamie gives $1,700 to an SGO and Alex gives $1,700, each designating the gift as a qualified contribution. Under Treasury’s proposed regulations each spouse is a separate taxpayer for the $1,700 cap, so they claim $3,400 of credit on their joint return (subject to their combined tax liability, with any excess carried forward). Had Jamie alone given $3,400, only $1,700 would be credited: the cap applies to each spouse’s own contributions. The uncredited $1,700 could be treated as a regular §170 charitable contribution (deductible under the normal charitable rules); only amounts credited under §25F are barred from also being deducted. Treasury’s own version of this example has each spouse give $2,000: each gets a $1,700 credit, and the other $600 between them may be deductible. The proposed regulations do not say how a single gift from a joint bank account is divided between spouses, so the safe course is two separate gifts, each made and designated by one spouse.

If you also get a state tax credit

Several states already give their own tax credit for gifts to scholarship organizations. §25F(b)(2) reduces the federal credit by any state credit allowed for the same contribution, and Treasury’s proposed regulations settle the order: the state credit is subtracted from your qualified contributions first, and the $1,700 cap applies to what is left. Treasury explains that the reduction exists to keep the combined federal and state benefit from exceeding the gift, not to shrink the federal credit for donors in states with their own programs. How the federal and state programs fit together.

Example 5: A gift that also earns a state credit

Treasury’s preamble uses this case. A donor designates a $2,500 gift and claims a $500 state credit for it. The state credit comes off first, leaving $2,000, which is above the cap, so the federal credit is the full $1,700. Applying the cap first would have left only $1,200, and Treasury rejected that reading. In a second Treasury example, a donor designates a total of $2,000 (split between two SGOs) and claims a $400 state credit; $1,600 remains, below the cap, so the federal credit is $1,600.

Example 6: Designating only part of a gift

Also from the proposed regulations: a donor gives $4,000, designates $1,700 of it as a §25F qualified contribution, and claims a $400 state credit that covers the whole gift. The ordering rule treats the state credit as coming first from the $2,300 that was not designated, so the $1,700 is untouched and the federal credit is the full $1,700.

A state deduction is not a state credit and does not reduce the federal credit. State credit carryforwards or carrybacks tied to the gift are treated as allowed in the year of the gift. More on the ordering rule.

A note on the Alternative Minimum Tax (AMT)

Treasury’s proposed regulations say the credit is allowed against the tax imposed by both §1 (regular tax) and §55(a) (AMT), so being subject to AMT does not block it. The limit is the §26(a) tax liability limitation: your total tax, reduced by the nonrefundable personal credits listed above (§§21, 22, 24, 25, 25A, 25B, 25C and 25E). Any credit that limit leaves unused carries forward for up to five years. High-income donors with substantial AMT exposure should still run the numbers with a tax professional.

If your state hasn’t opted in

You can still claim the EFTC federal tax credit by donating to a qualifying SGO in a state that has opted in. The credit is federal and not restricted to your home state; Treasury’s proposed regulations say a taxpayer may give to any SGO on any participating state’s list, regardless of where the taxpayer lives. The catch: the scholarships funded by your donation will support students who live in that other state, not in yours. Under the proposed rules, a student’s state of residence decides which state’s SGOs can fund them, not where the school is.

For most donors who want their dollars to stay in their own community, this is the strongest argument for pushing your state’s governor to opt in: without participation, your federal tax dollars effectively flow elsewhere. Check your state’s status. States decide one year at a time. Under Treasury’s temporary regulations, a state that wants to participate in 2027 must file an advance election (Form 15714) by January 1, 2027 and submit its SGO list by February 15, 2027.

What’s settled and what’s still open

Treasury and the IRS released two sets of rules on October 1, 2026. Their legal status differs, and it matters for how much weight a donor can put on each point above.

• Binding (temporary regulations, T.D. 10057): what counts as a qualified cash contribution and the designation-at-the-time-of-gift rule, SGO registration in an IRS portal, the January 31 donor acknowledgment, the February 28 report to the IRS, and the state election and SGO list procedures. They were issued without a comment period, apply from September 1, 2026, and expire October 1, 2029.
• Proposed, with reliance allowed for 2027 gifts: the $1,700-per-spouse treatment, the state-credit ordering rule, the AMT and carryforward rules, the partnership and S corporation bar, donor reliance on the IRS SGO list, and Form 8525. Taxpayers may rely on these for contributions made on or after January 1, 2027 if they follow them in full and consistently. Final rules could change them.
• Still open: Form 8525 and its instructions; the opening of the IRS SGO portal; the IRS SGO list itself, which depends on the state lists due February 15, 2027; and Treasury’s separate §530 guidance on which expenses qualify and what counts as a school, which it calls a high priority. The rules also do not address gifts made through donor-advised funds, IRA qualified charitable distributions, employer matching programs, or trusts and estates. Paycheck withholding is not covered either; ordinary withholding rules apply.

How to comment before December 1, and our full read of the October 2026 rules.

Frequently asked questions