Tax Credit

Federal School Choice Tax Credit

School choice has become a major priority for Republican lawmakers, and one way they are working to expand it is through tax incentives. Instead of using traditional school vouchers, tax credits can encourage people to donate money to organizations that provide scholarships for students to attend private K-12 schools.

Many states already have similar programs. In 2020, the Supreme Court also ruled that these scholarship programs can be used to help students attend religious schools. Now, the federal government is introducing its own tax incentive for education donations.

The new Federal Scholarship Tax Credit (FSTC) will begin in 2027, meaning taxpayers will first see it on federal tax returns filed in 2028. The credit allows individuals to receive a federal tax credit of up to $1,700 when they donate cash to qualifying organizations that provide scholarships to K-12 students. There is no income limit, so taxpayers with higher incomes can also qualify. The credit can be used toward regular income tax and alternative minimum tax, and any unused credit can be carried forward for up to five years. However, there are some requirements. The state where the scholarship organization is located must participate in the federal program. As of mid-May, 27 states had opted in, including Florida and Georgia, although additional states could join before 2027.

The organizations receiving these donations also have to meet specific requirements. They must generally be qualifying 501(c)(3) charities and keep track of donations that qualify for the federal credit. The scholarships can only go to eligible students who meet certain income and residency requirements. The money can be used for expenses such as tuition, school fees, tutoring, books, supplies, uniforms, computers, and certain room and board costs. There are also rules against receiving double tax benefits. If you receive a state tax credit for the same donation, your federal credit may be reduced. You also cannot claim both the FSTC and a charitable donation deduction for the same contribution.

Overall, the new federal tax credit gives taxpayers another potential way to support K-12 scholarships while receiving a tax benefit themselves. However, taxpayers will need to make sure both the organization and their donation meet the program's requirements before claiming the credit.