Income verification for SGOs: confirming household eligibility under §25F

Confirming a family is eligible is one of the requirements an organization must meet to be a Scholarship Granting Organization at all, alongside the 90/10 rule and the rest of §25F(d). This is the practical walkthrough: what the income test actually measures, what documents establish it, how to right-size an award once a family qualifies, and how to keep records that hold up later. For the eligibility rules from the family’s side, see who qualifies and what’s covered; the statutory text is at IRC §25F.

What area median gross income means

Section 25F(c)(2)(A) defines an eligible student as someone whose household income, for the calendar year before the scholarship application, is not greater than 300% of the area median gross income (AMGI), as that term is used in IRC §42 (the Low-Income Housing Tax Credit). That borrowed definition matters: it means AMGI is not a single federal number. Section 42 points back to HUD’s Section 8 housing rules, and Treasury’s proposed regulations (October 2026), which SGOs may rely on for 2027, follow that chain: AMGI is calculated the way HUD calculates it for Section 8, by area, with HUD’s adjustment for family size. The proposed rules say the IRS will publish the resulting figures by area and family size every year in the Internal Revenue Bulletin. As of October 1, 2026, the first set has not been published.

The family-size adjustment is a multiplier on the area’s median. Treasury’s preamble lists HUD’s current multipliers: 0.70 for a household of one, 0.80 for two, 0.90 for three, 1.00 for four, 1.08 for five, 1.16 for six, 1.24 for seven, and 1.32 for eight, plus 0.08 for each additional person. Treasury’s own worked example: where AMGI is $100,000, a household of three qualifies at income up to $270,000 (3 × $100,000 × 0.90), and a household of four at up to $300,000. Treasury estimates that about 95% of U.S. children live in households under the limit (about 96% of children in participating states once the safe harbors below are counted); see our news read of the income rules.

Two things follow from the local definition. First, “area median gross income” is not the federal poverty level, and it’s not a flat national median income either: it’s local median income, multiplied by three. Second, because area medians differ so much by geography, the same household income can clear the bar in a high-cost metro area and fall short of it in a lower-cost region. There is no dollar figure an SGO can post once and reuse everywhere it operates; the threshold has to be looked up for the applicant’s specific area and household size, and it changes each year when new figures are published.

300% is a ceiling, not a floor. Treasury’s preamble says an SGO may set a lower income limit for its own scholarships (its examples are 80% and 50% of AMGI) or narrow its focus in other ways, such as to particular subjects, as long as it meets every §25F requirement. The preamble draws the line between the two: an SGO may narrow its own program, but a state may not require SGOs to operate more restrictively than §25F (a bar that is also in the temporary regulations, which take effect without a comment period and apply from September 1, 2026).

Which year’s income counts

The statute measures income for “the calendar year prior to the date of the application for a scholarship,” not the year the scholarship is awarded or used. A family applying in 2027 is assessed on 2026 household income; a 2028 application looks at 2027 income, and so on. That fixed look-back year is what makes the test objective: it doesn’t move if a family’s income changes between application and award, and it gives the SGO a specific tax year of documentation to request rather than an estimate of “current” income.

What the rules don’t say is how often a continuing student must be re-verified. Neither the statute nor the proposed regulations sets a schedule, and renewal priority (§25F(d)(1)(D)) moves a returning student up the line without exempting the family from the income test. One signal points toward checking each year: in explaining why a multi-year award counts as spent only when each payment goes out, Treasury’s preamble refers to the SGO determining annual household income and family size “as of the time when the scholarship is paid.” The cautious practice is to treat each school year’s renewal as a new application and verify the prior calendar year’s income again.

What establishes household income

Section 25F(d)(1)(F) requires the SGO to verify, but the statute doesn’t itself list what counts as proof. Treasury’s proposed regulations, released October 1, 2026, require the SGO to use one or more of four methods. The first, direct verification, is the route for any applicant who doesn’t fit one of the shortcuts in the next section. It accepts:

• Prior-year federal or state tax returns (Form 1040 and schedules) for the applicable prior calendar year
• W-2s and other wage statements
• Recent pay stubs, typically used to fill gaps or corroborate a return
• IRS wage and income transcripts, useful when a family didn’t file a return or documents are unavailable
• Evidence of income not on those documents, such as child support or alimony not reported as income (or a certification that there is none)
• Other relevant data sources, which the proposed regulations also accept

None of that is a statutory checklist. It’s the method the proposed regulations describe, and each SGO publishes its own specific document requirements within that framework. An SGO also has to verify family size, not just income, since the 300% AMGI threshold itself is adjusted for household size: a family of five and a family of two in the same county face different dollar cutoffs.

Who counts as the household

Under the proposed regulations, a student’s household is the student plus every person living with the student, following HUD’s focus on who lives together rather than who claims whom on a tax return. That can include grandparents, other relatives, or unrelated adults in the home, and family size is the number of people in that household.

If the student lives in more than one household during the year, shared custody being the obvious case, the relevant household is the one where the student lived for the longest period that year. If the time is split equally, it is the household with the higher income. An application form that asks only “who claims this child as a dependent” won’t capture either rule.

What counts as income

Household income is “annual income” as HUD defines it at 24 CFR 5.609, with a change Treasury made for workability: the imputed return on net assets is disregarded. HUD’s own rule imputes a return on assets above $50,000 when actual returns can’t be calculated, which would count things like unrealized appreciation in a home or stock. The proposed regulations drop that, and drop non-cash receipts generally (a Section 8 housing allowance, for example), because those items rarely appear on any document an SGO can check. What stays in: child support and alimony a household member receives, even when they aren’t taxable income. That is why the direct method asks for proof of untaxed child support or alimony, or a certification that there is none. Treasury estimates the cash-only definition is what lifts eligibility from about 64% of school-age children under HUD’s strict definition to about 95%.

Categorical eligibility and the foster safe harbor

The other three methods are shortcuts that avoid a full document review in specific cases. Treasury’s stated aim is to spare families and SGOs from collecting more sensitive income information than necessary when another reliable indicator is present:

1. Categorical eligibility, where an award letter dated within the last 12 months, showing a household member currently receives SNAP, TANF, WIC, Section 8 housing, or SSI, stands in for a fresh income review. Only those five programs qualify. School-wide free or reduced-price lunch eligibility does not count, because the statute requires a household-level determination, and Treasury has asked for comments on adding state and tribal programs. Treasury estimates about 36% of students fall under this method.
2. An automatic safe harbor for foster children: a child removed from a parent’s or guardian’s custody and placed under the care or legal responsibility of a child welfare agency is treated as meeting the income test without any income check. Treasury’s reasoning is that a child moving between several placements in a year has no single household whose income an SGO could reliably verify.
3. A low-income-area tutoring and special-needs safe harbor, for individual academic tutoring or special-needs services for students the school selects based on academic or special need, at a school in a HUD qualified census tract (or a school that certifies at least 80% of its students live in one). The SGO must obtain an annual third-party audit and give it to the state. The audit has to certify the school’s eligibility, the need-based selection, that tutors or providers were qualified, that each student’s need was independently diagnosed by a professional not associated with the provider, and that the services met quality standards, ran long enough to help, and had their impact on each student assessed. The SGO also reports each year how many students it selected this way.

These are proposed, not final. Treasury says taxpayers, SGOs, and states may rely on the proposed regulations for contributions made on or after January 1, 2027, if they follow them in their entirety and consistently, so an application process built now can use direct documentation as the default path and offer these shortcuts where they fit. Comments are due December 1, 2026, and final rules could change the details.

Right-sizing the award

Passing the 300% AMGI test tells an SGO a family is eligible; it doesn’t tell the SGO how much to award. Nothing in §25F requires an award to match a family’s unmet need dollar for dollar, but the proposed regulations do set a hard ceiling on what can be paid out: the cost of the expense. A school or vendor must return any payment above the student’s costs, and the SGO must run systems that stop two scholarships from together paying more than the cost of the same expense (see disbursing funds). Below that ceiling, stretching scholarship dollars deliberately is good stewardship, and it interacts directly with the 90/10 rule: every dollar awarded above what a family actually needs to cover qualifying expenses is a dollar not available to the next eligible applicant.

Practical right-sizing questions

• What are the family’s actual qualifying expenses for the year (tuition, tutoring, special-needs services, a device), and what portion is already covered by another source (a school discount, a state credit program, another scholarship)?
• Does the household sit well under the 300% AMGI line, or close to it? Many SGOs weight awards toward the lower end of the eligible range even though the statute doesn’t require it, since there is no statutory priority for lower-income families over higher-income (but still eligible) ones beyond the mandatory renewal and sibling order. An SGO that wants a firmer line can adopt a lower income limit outright, which Treasury’s preamble expressly allows.
• Is this a renewal or a new applicant? Renewal and sibling priority are mandatory under §25F(d)(1)(D). The proposed regulations give SGOs flexibility by award type: priority matters most for tuition, fees, and room and board, so a returning student can stay at the same school, while tutoring and special-needs awards can be prioritized by need for the services.

Keeping records that survive an audit

Treasury’s proposed regulations require every SGO to undergo an annual financial and programmatic audit by a qualified independent third party and send the results to each state that lists it. An SGO with more than $500,000 in total receipts must hire an external, independent professional or accredited body; an SGO at or under $500,000 may use a committee of independent people unrelated to its management, who sign the report under penalties of perjury. Either way, the audit must cover the SGO’s procedures for verifying each student’s eligibility, and the SGO separately certifies each year that it verified scholarships went only to eligible students. That changes what a verification file needs to contain: not just a yes/no eligibility determination, but a reconstructable record of how the SGO reached it. (More on the audit in our news read of the audit rule.)

• Record which method was used for each student: direct, categorical, the tutoring and special-needs safe harbor, or the foster-child safe harbor, plus the evidence that method requires (the program award letter and its date, the agency placement record, the school’s census-tract status or certification).
• Keep the source documents, not just a summary spreadsheet: the tax return, W-2, or transcript actually reviewed, tied to the specific applicant and the specific calendar year it covers.
• Record the household: who lives with the student, the family size used, and, in a shared-custody case, which household was used and why.
• Record the AMGI figure used: the published figure, the area, the family size applied, and the date it was looked up. The figures update annually; an auditor will want to see which year’s figure backed a given determination.
• Log who verified and when. Verification isn’t self-attestation, so the file should show a staff member or system reviewed the documents against the threshold, not just that documents were received.
• Re-verify on a set schedule rather than indefinitely. The rules don’t fix a cadence, but income changes, the test is tied to each application, and a scholarship running for years on a stale verification is exactly the kind of gap an audit will flag.
• Separate the verification record from award accounting, but keep them linkable: an auditor testing the 90/10 ratio and an auditor testing eligibility compliance are asking different questions, and the file should answer both without being the same document.

Statutory duty vs. operational practice

It’s worth keeping the layers separate, because they carry different weight: the statute is fixed, the proposed regulations can still change before they are final, and practice is each SGO’s call:

• Fixed by statute: the 300% of AMGI ceiling (§25F(c)(2)(A)), the SGO’s duty to verify household income and family size and limit awards accordingly (§25F(d)(1)(F)), and the prior-calendar-year measurement window.
• Set by Treasury’s proposed regulations (October 2026; SGOs may rely on them for 2027 contributions, but they are not final): AMGI computed the Section 8 way with HUD’s family-size adjustment and published by the IRS each year; the household as everyone living with the student, with the shared-custody tie-breakers; cash-only household income under 24 CFR 5.609, with untaxed child support and alimony included; the four verification methods; the no-overpayment and duplicate-award rules; and the annual audit and certification.
• Operational practice, not statute or rule: which specific documents an SGO accepts within those methods, its re-verification cadence, whether it sets a lower income limit than 300%, and how it sizes an award once eligibility is established. Each SGO sets its own process within that framework, and final rules could still adjust it.

Once a family is verified and an award is set, the money still has to move, and move cleanly. See how SGOs disburse scholarship funds to schools and families, and for the full compliance calendar these obligations sit inside, the SGO compliance calendar.

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