The One Big Beautiful Bill Act created a federal tax credit for donations to K-12 scholarship organizations. The provision is codified at 26 U.S.C. § 25F, added by Section 70411 of Public Law 119-21, signed in July 2025. It takes effect for the 2027 tax year.
Arizona has run its own version of this since 1997. The federal program borrows the structure closely enough that anyone who has worked with an Arizona School Tuition Organization will recognize most of the rules, including the 90% spending requirement, which is lifted almost exactly from Arizona law.
How the Credit Works
Starting in 2027, an individual who donates cash to a qualifying scholarship granting organization, or SGO, can claim a federal tax credit of up to $1,700 a year. It is a credit rather than a deduction, so it reduces the tax bill directly rather than reducing taxable income. Arizona taxpayers have had access to the same mechanism at the state level through the state’s tax credit programs for close to thirty years.
Qualifying as an SGO
To qualify as an SGO under the federal statute, an organization has to:
1. Hold 501(c)(3) status as a public charity. Private foundations do not qualify.
2. Keep contributions in a segregated account, separate from general operating funds.
3. Serve at least ten students who do not all attend the same school.
4. Spend at least 90% of qualified contributions on scholarships.
The 90% requirement matches what Arizona has required of School Tuition Organizations since the program began. The segregated account requirement is new for organizations used to Arizona’s framework, which does not impose the same accounting separation, and it is worth setting up before an organization starts accepting these contributions rather than after.
States Have to Opt In
The credit is not automatically available to donors in every state. A state has to elect to participate, and its governor, or whoever state law designates, has to certify a list of approved SGOs to the Treasury Department. The IRS described the process in Revenue Procedure 2026-6, which allows a state to make an advance election for 2027 through Form 15714, filed on or after January 1, 2026.
Twenty-seven states have made that election so far: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.
Arizona is not on that list yet, and neither is Washington, our other practice state. Organizations running Arizona STOs should not tell donors to expect the federal credit until Arizona actually opts in.
Who Can Receive a Scholarship
A student must be eligible for public school and live in a household earning no more than 300% of the area median gross income, a figure HUD calculates annually by location. That threshold covers roughly nine out of ten K-12 students nationally, so income screening is unlikely to disqualify many applicants.
What to Do Now
Organizations that already run an Arizona STO have most of what this program requires already in place operationally. The main gap is the segregated account rule and the requirement to serve students across more than one school. Organizations building an SGO in a state without Arizona’s history should look to Arizona’s STO practices as a starting point, since that program has already worked through most of the practical issues this one will raise.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form. This post is for general informational purposes and does not constitute legal advice.