TL;DR
- State tax-credit scholarship programs (Arizona, Florida, Pennsylvania, Indiana, Ohio, Georgia, Iowa, and others) predate the federal credit by years and keep running under their own state statutes, unaffected by it.
- The federal EFTC (§25F) is a separate, federal credit worth up to $1,700 per taxpayer, starting January 1, 2027. It doesn’t replace, merge with, or automatically extend any state program.
- A donor can generally benefit from both, as long as the two credits together don’t exceed the gift: §25F(b)(2) reduces the federal credit by any state credit claimed on the same designated contribution, and Treasury’s proposed rules subtract it before the $1,700 cap applies ($2,500 given, $500 state credit, full $1,700 federal credit). Two separate donations sidestep the question.
- An organization already qualified under a state program is not automatically federally qualified. Adding the federal layer means meeting §25F’s own rules and getting on your state’s federal list, a parallel track, not a paperwork extension. Under the proposed rules, state-program scholarships count toward the 85% activity test that lets an SGO apply the 90% spending rule to its §25F account alone.
How state programs work, in general
Long before the federal credit existed, a number of states built their own K-12 tax-credit scholarship programs. Arizona’s is among the longest-running, dating to the 1990s. Florida, Pennsylvania, Indiana, Ohio, Georgia, and Iowa are among the other states that have run similar programs for years, and the exact list of participating states shifts over time as legislatures act.
The basic mechanism is consistent across states, and it’s the same mechanism the federal credit later borrowed: a donor gives cash to a state-qualified nonprofit, usually called a scholarship granting organization (SGO) or a similarly named entity, and receives a credit against their state income tax. The SGO uses the donation to fund scholarships for eligible students at participating schools. Treasury leaned on these programs when it sized the federal one: its estimate of 600 to 700 §25F SGOs by 2030 assumes each participating state ends up with about as many SGOs as the average state with a tax-credit scholarship program has now. That is an estimate, from the economic analysis in the proposed regulations.
What varies enormously, and what this article deliberately does not put numbers on, is the specifics: the credit percentage (dollar-for-dollar in some states, a partial percentage in others), the annual dollar cap per donor, the total statewide program cap, the income eligibility rules for students, and whether individual donors, corporate donors, or both can participate. Those figures change from legislative session to session in every state that has a program. For current numbers in your state, check your state department of revenue or a local school-choice advocacy organization, not a number in an article that may be a year or two old.
Two separate systems, not one upgraded program
The single most important thing to understand about the relationship between state programs and the federal credit is that they are not the same system at two levels of government. They are two independent legal regimes that happen to use a similar mechanism (donate cash to an SGO, get a tax credit). For the full side-by-side comparison, see EFTC vs. state scholarship tax credits. The short version:
- A state program runs under state law, funded by a reduction in that state’s own tax revenue, with rules the state legislature sets and can change any year.
- The federal EFTC runs under §25F of the Internal Revenue Code, is funded by a reduction in federal tax revenue, and is uniform nationally: up to $1,700 per taxpayer, described in the statute itself.
- A state can have one without the other. A state with a decades-old scholarship tax credit program is not automatically opted in to the federal credit, and a state that has opted in to the federal credit does not need a pre-existing state program to do so. See what it means when a state opts out of the federal credit for how the federal opt-in decision works on its own track.
The rule that actually governs stacking
Whether a donor can benefit from both a state credit and the federal credit is not a matter of guesswork, the statute addresses it directly. §25F(b)(2) states:
Read plainly, this reduces the federal credit, dollar for dollar, by any state credit claimed for the same contribution. It is not a bar on participating in both programs, it is a bar on double-counting the identical dollars. Two donations to two different qualifying organizations, one state-qualified and one federally listed, are two separate contributions, and the reduction rule has nothing to reduce. Treasury’s proposed rule says the same: only state credits allowed for your qualified (§25F-designated) contributions count against the federal credit.
Treasury’s proposed regulations, released October 1, 2026, settle the order of operations in the donor’s favor, and taxpayers may rely on them for contributions made on or after January 1, 2027. The state credit comes off the qualified contributions first, and the $1,700 cap applies to what remains (Prop. Treas. Reg. §1.25F-2(c)). Treasury’s example: a $2,500 contribution that earns a $500 state credit leaves $2,000, so the federal credit is the full $1,700, not the $1,200 a cap-first reading would give. The reduction still bites on smaller gifts: in Treasury’s Example 3, $2,000 of qualified contributions with a $400 state credit leaves a $1,600 federal credit. When a state credit is allowed on a mix of designated and undesignated gifts, it is treated as coming first from the undesignated ones (Example 4: $4,000 given, $1,700 designated, a $400 state credit, and the full $1,700 federal credit survives). A state credit carried forward or back counts in the year of the gift, and a state deduction, as opposed to a credit, doesn’t reduce the federal credit at all. Treasury estimates that about 46.5 million taxpayers will be eligible for both a state and a federal credit for SGO gifts. More in $2,200 back on a $2,500 gift.
There is a real edge case worth flagging honestly: some SGOs will be qualified under both a state program and the federal program at the same time. If a single contribution to such an organization earns a credit on both your state and federal returns, the state credit comes off your designated amount before the $1,700 cap, as above. Two things to know at a dual-qualified SGO. First, the §25F designation is made when you give and can’t be undone, and every designated dollar goes into the SGO’s separate §25F account, so decide up front how much of the gift is for the federal credit. Second, whether a particular state’s credit rules treat a gift designated for §25F as eligible for its own state credit is a state-law question this article can’t resolve in general; it depends on your state’s program rules. When in doubt, keep the two donations separate and confirm with a tax advisor familiar with your state.
What a donor already giving to a state program should do
- Keep giving to your state program as usual. The federal credit doesn’t change your state program’s rules, its deadlines, or its eligibility. Nothing about §25F requires you to change how you already give.
- Add a separate donation to a federally-listed SGO to also claim the EFTC, starting with contributions made on or after January 1, 2027. The gift must be cash (not stock or crypto), from you as an individual (a partnership’s or S corporation’s gift doesn’t pass through), and designated as a §25F contribution when you make it. The SGO can be on any covered state’s list, not just your own state’s. See how donors claim the federal credit for the mechanics, cash-only rule, and worked examples.
- Confirm the organization is federally listed before assuming a gift to your existing state-program SGO also earns the federal credit. Federal listing is a separate act by your state under §25F(g); a long-time, well-regarded state program doesn’t automatically appear on the federal list. Under Treasury’s proposed rules, you may rely on an organization’s presence on the IRS SGO list at the time you give, unless you knew it didn’t qualify. The IRS hasn’t published that list yet.
- Keep your records straight, a state-credit receipt and a federal-credit acknowledgment are two different documents, and you’ll need both if you claim both credits in the same year. The federal acknowledgment is due from the SGO by January 31 of the following year and carries a unique donor number, which you report on IRS Form 8525 (not yet released).
Already running a state program? Adding the federal layer
For an SGO that has operated under a state tax-credit scholarship program for years, sometimes long enough to have institutional memory, an audited track record, and a donor base, the federal credit looks at first glance like a formality. It isn’t. The federal program has its own eligibility test, and being state-qualified doesn’t satisfy it. What actually changes:
Your state has to opt in, separately, at the federal level
A state running a decades-old scholarship credit program has not thereby opted in to §25F. The state’s governor (or whoever state law designates) has to make a separate election, one calendar year at a time, and submit a list of qualifying SGOs to the IRS under §25F(g). Treasury’s temporary regulations, which apply from September 1, 2026, set the 2027 dates: an advance election on Form 15714 by January 1, 2027, then the SGO list by February 15, 2027, through a new IRS State section 25F portal. The state must list every organization located in the state that seeks inclusion and meets the requirements, and it may not require SGOs to operate more restrictively than §25F, “such as by limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses.” Your state program’s own limits still govern its state-credit scholarships; they can’t become conditions for the §25F list. Read how the governor opt-in process works if your state hasn’t yet.
Your organization has to meet §25F(d)’s own rules
Even once your state opts in, an individual SGO must separately meet the federal requirements to be listed, among them: serving 10 or more students who don’t all attend the same school, spending at least 90 percent of income on scholarships, maintaining a separate account exclusively for qualified contributions, honoring renewal and sibling priority, verifying household income against the federal 300%-of-area-median-income test, funding only students who reside in the state, and not earmarking gifts for specific students. Your state program may already require some of these, most do, but the federal rules are their own independent test, not automatically satisfied by state compliance.
Treasury’s proposed regulations fill in how those tests work, and several details matter to a state-program organization:
- The 90% test and the 85% safe harbor. “Income” means all gross receipts from every source. But if at least 85% of your activities are scholarship granting, and state tax-credit scholarships count toward that share, you can apply the 90% test to your §25F account alone, and each year’s income has until the end of the following year to be spent. Treasury estimates that SGOs running state programs spent 78% of revenue on program-related costs on average in fiscal year 2024, so for most of them the safe harbor is the path. See the 90% rule.
- Income verification may differ from your state’s. A categorical shortcut covers households receiving SNAP, TANF, WIC, Section 8 housing, or SSI, and foster children qualify automatically. School-wide free or reduced-price lunch status does not count. See income verification for SGOs.
- Disqualified persons are defined broadly. No scholarships to substantial contributors, officers, directors, anyone who helps select recipients or set awards (committee members included), or their family members, with no exception for blind selection or volunteers.
- “Located in” the state means authorized to do business there and compliant with its charity laws (a binding temporary-regulation definition). No in-state headquarters is needed, so an established SGO can seek a place on more than one state’s list; an SGO on two or more lists must be at least 85% scholarship granting and keep a separate §25F account for each state.
Fund accounting gets more layers, not fewer
If you already segregate state-credit-qualified funds from general operating funds, and most established state programs require exactly that, adding the federal program means a third bucket: contributions that earn the federal credit need their own separate account under §25F(c)(5)(B), distinct from both your operating funds and any state-credit-designated funds. Under the proposed rules, every gift a donor designates for §25F goes into that account, along with its earnings, and nothing else does. Treat this as a genuinely separate compliance track with its own audit trail, not a relabeling of your existing state accounts. The federal reporting adds up too: register in the IRS SGO portal (not yet open), send each donor a written acknowledgment with a unique donor number by January 31, report donor totals to the IRS by February 28, and, under the proposed rules, file an annual certification with your Form 990 and obtain an annual financial and programmatic audit (by an independent outside auditor if receipts exceed $500,000), with copies to each state that lists you.
Your donor pitch has to distinguish the two credits
Donors familiar with your state program will reasonably ask how the federal credit interacts with what they already give. Be able to explain, in plain terms, that the two are separate credits on separate returns, that a single gift can earn both, with the full $1,700 federal credit intact when at least $1,700 is designated and the gift is big enough to cover both credits (Treasury’s example: $2,500 given, $500 state credit, full $1,700 federal credit), that two separate gifts also work, and that a gift earning the state credit doesn’t automatically also earn the federal one unless your organization is federally listed and the donor designates the gift for §25F when making it.
For the full build-out, from incorporation through getting listed, see how to start an SGO under the EFTC. Organizations running both a state and a federal program in parallel are also the group that most needs software built for the dual-track accounting and donor receipting this creates, SGO HQ is built around exactly that separate-account, per-donor substantiation problem.
Checking your state
These are two different lookups, don’t conflate them. For your state’s federal EFTC opt-in status, the state-by-state status map tracks exactly that, in one place, kept current. For your state’s own tax-credit scholarship program, that’s a state-law question this site doesn’t track state-by-state, check your state department of revenue or a local school-choice advocacy organization for current caps, percentages, and deadlines.
Frequently asked questions
Does my state have a tax-credit scholarship program?
Several states have run their own K-12 tax-credit scholarship programs for years, independent of the federal government, including Arizona, Florida, Pennsylvania, Indiana, Ohio, Georgia, and Iowa, among others. Each state writes its own rules on credit percentage, dollar caps, and eligibility, and those rules change from year to year, so confirm current details with your state department of revenue or a local school-choice organization rather than relying on a number you saw once. A state program's existence is entirely separate from whether that state has opted in to the federal EFTC.
Can I use both a state scholarship tax credit and the federal EFTC?
Yes. The one limit is that, combined, the two credits can't exceed what you gave. §25F(b)(2) reduces your federal credit by any state credit allowed for your qualified (§25F-designated) contributions. Under Treasury's proposed regulations (October 2026), which taxpayers may rely on for 2027 contributions, the state credit is subtracted from the designated amount before the $1,700 federal cap applies, so a $2,500 gift that earns a $500 state credit still supports the full $1,700 federal credit, $2,200 back in total. Two separate donations also work: one to an organization qualified under your state's program (claimed on your state return) and one designated for §25F to an SGO on the federal list (claimed on your federal return, up to $1,700 per taxpayer). A state credit on dollars you didn't designate for §25F doesn't count against the federal credit. Confirm the state side with a tax advisor familiar with your state's rules.
How does §25F interact with Arizona's, Florida's, or Pennsylvania's existing programs?
The same way it interacts with any state's program: the federal credit runs on its own track. It doesn't replace, absorb, or automatically extend a state program. Whether a state's existing scholarship-tax-credit infrastructure also participates in the federal EFTC depends on whether the state has separately elected under §25F(g) (through its governor or whoever state law designates) and whether specific organizations are on its §25F SGO list. A state can have a long-running, well-known state credit program and still not be opted in to the federal credit, and vice versa. When a state does elect, Treasury's temporary regulations require it to describe its own SGO tax credit to the IRS as part of the election.
If I donate to an organization that qualifies for both credits, does anything change?
Yes, this is the case where the reduction rule in §25F(b)(2) actually bites. If the same designated contribution earns you a credit on your state return, that state credit is subtracted from the contribution before the $1,700 federal cap applies (under Treasury's proposed regulations). If what remains is still $1,700 or more, as with a $2,500 gift and a $500 state credit, the federal credit is unaffected; if it falls below $1,700, the federal credit shrinks to match. In Treasury's Example 3, $2,000 designated with a $400 state credit leaves a $1,600 federal credit. If you designate only part of a gift for §25F, the state credit is treated as coming first from the part you didn't designate (Example 4: $4,000 given, $1,700 designated, $400 state credit, full $1,700 federal credit). The combined benefit can't exceed the gift. Making two separate gifts keeps the math simple.
Will the federal EFTC replace state tax-credit scholarship programs?
No. Nothing in §25F preempts, sunsets, or folds in state programs. States that have run scholarship tax credits for a decade or more continue to run them under state law exactly as before. §25F is an additional, federal layer that a state and its SGOs can choose to also participate in. Treasury's proposed rules were written to keep it that way: Treasury says shrinking the federal credit for donors who also claim a state credit "would discourage those States from continuing to provide a State tax incentive," and it chose the reading that avoids that.
Do I need to be in an EFTC-opted-in state to use my state's own program?
No. Your state's tax-credit scholarship program runs on its own statute and its own list of qualifying organizations, set by state law. Whether your state has separately opted in to the federal EFTC has no bearing on your eligibility for the state program.
We already run a state-qualified SGO. What's different about adding the federal program?
The federal program has its own eligibility test, its own list, and its own compliance rules under §25F and Treasury's regulations: the 90 percent spend-on-scholarships requirement, a 10-or-more-students rule, a separate §25F segregated account that receives every designated gift, registration in the IRS SGO portal, donor acknowledgments by January 31 and IRS reporting by February 28, and getting on the §25F SGO list your state submits to the IRS under §25F(g). Under Treasury's proposed regulations, if at least 85 percent of your activities are scholarship granting (state-program scholarships count), the 90 percent test applies to your §25F account alone; below 85 percent, it applies to everything you take in. Being state-qualified does not automatically make you federally qualified, and your state cannot carry its own program conditions, such as limits on which schools or expenses qualify, into the §25F list: the temporary regulations bar states from requiring SGOs to operate more restrictively than §25F. Treat it as adding a second, parallel compliance track rather than a simple extension of your existing state paperwork.
Where do I check whether my state participates in the federal credit?
The state-by-state status map tracks opt-in status for the federal EFTC specifically. It does not track state scholarship-tax-credit programs, those are a separate list you'd need to check with your state revenue department or a school-choice advocacy group in your state.
