The $1,700 Loophole: How the New Federal School Choice Tax Credit Lowers Private Tuition Bills

Starting July 4, 2025, a provision buried deep in a sprawling federal spending bill lets individual taxpayers redirect up to $1,700 of what they would otherwise owe the IRS — sending it instead to a nonprofit that funds private school tuition for qualifying families. The mechanism is Section 25F of the Internal Revenue Code, added by Section 70411 of the One Big Beautiful Bill Act (Public Law 119-21). The IRS calls it the Federal Scholarship Tax Credit (FSTC). It is not a voucher program, not a deduction, and not a refund — it is a dollar-for-dollar reduction in your federal tax bill, available to any individual taxpayer in a participating state beginning in tax year 2027. For families comparing private and public school options, and for donors wondering where that money goes anyway, here is exactly how it works.

What the Federal Scholarship Tax Credit Is

Section 25F creates a nonrefundable credit of up to $1,700 per individual taxpayer per year. “Nonrefundable” means it reduces what you owe to zero — but if the credit exceeds your actual tax liability, the IRS keeps the difference. No refund is issued.

The $1,700 cap applies per taxpayer, not per household and not per child. A married couple filing jointly could claim up to $3,400 in combined credits — one for each spouse, provided each owes that much in federal income tax.

Senator Ted Cruz (R-TX) championed this provision through the Senate. The credit is permanent — it carries no sunset clause and sits in the tax code indefinitely unless Congress later amends it.

One critical wrinkle: the federal credit is reduced dollar-for-dollar by any state income tax credit the donor claims on the same contribution. If your state offers a 75% credit on scholarship donations and you claim it, your federal credit shrinks by that amount. The intent is to prevent stacking federal and state incentives on the same dollar.

Who Qualifies for a Scholarship

Scholarship recipients must come from households earning at or below 300% of the area median gross income (AMGI). EdChoice, a nonpartisan school choice research organization, estimates this income threshold covers roughly 90% of K-12 students in the United States. In practical terms: this program is not limited to low-income families. A family of four in a median-income suburb likely qualifies.

Students do not need to be currently enrolled in private school to apply. Families can use awards to transition from public to private, or to offset costs they are already paying out of pocket.

How a Donor Claims the Credit

The mechanism runs through Scholarship Granting Organizations (SGOs) — state-approved nonprofits that collect contributions, verify family eligibility, and award scholarships. Donors do not send money directly to a school or family.

The sequence is straightforward:

1. A donor contributes cash to a qualified SGO in their state.
2. The SGO verifies family eligibility and awards scholarships to qualifying students.
3. The donor claims the credit on their federal return, capped at $1,700.

The credit applies only to contributions made on or after January 1, 2027. Contributions made in 2026, even December 31, 2026, do not qualify.

Donors must be individual taxpayers in a state that has formally opted in to the program. The IRS requires participating states to submit Form 15714 (Advance Election to Participate Under Section 25F). The window for state opt-ins opened January 1, 2026.

For donors who owe federal income tax and have been giving to education nonprofits anyway, the arithmetic is compelling. A $1,700 contribution that generates a $1,700 credit costs a taxpayer in the 22% bracket effectively nothing net of the credit — assuming no state credit offsets apply and assuming sufficient federal tax liability to absorb it.

Federal rules require that SGOs spend at least 90 cents of every dollar received on actual scholarships — limiting administrative overhead to 10% of contributions. This is a higher pass-through floor than many traditional charitable structures.

What Scholarships Can Pay For

The FSTC is one of the broadest school choice provisions in federal history in terms of allowable expenses. SGO scholarships can fund:

• Private school tuition — both secular and religious institutions are eligible
• Tutoring and educational therapies
• Transportation to and from school
• Technology (devices, software, internet access)
• Fees and extracurricular activities, including band instruments and sports fees
• Single courses at a public school that a private school student wants to take

The inclusion of religious schools reflects the legal landscape after the Supreme Court’s 2022 ruling in Carson v. Makin, which held that states cannot exclude religious schools from programs available to secular private alternatives. Section 25F is written to comply with that precedent explicitly.

Which States Are Participating

States must actively opt in — the FSTC does not apply automatically. As of mid-May 2026, approximately 27 states have opted in or announced intent to participate.

The earliest formal IRS Form 15714 submissions came from three states that moved within weeks of the opt-in window opening:

• Virginia — January 9, under Governor Glenn Youngkin (R)
• Mississippi — January 19, under Governor Tate Reeves (R)
• Georgia — January 20, under Governor Brian Kemp (R)

Families comparing school options in Virginia, Mississippi, and Georgia have the most certainty on participation, since their states completed the formal IRS filing before most others had acted.

The program has drawn some bipartisan support, but opt-in decisions have split mostly along party lines. Kentucky’s Republican-controlled legislature overrode Democratic Governor Andy Beshear’s veto to participate. New York Governor Kathy Hochul (D) announced intent in May 2026 — making New York the second Democratic-led state after Kentucky.

Several states with Democratic governors declined outright. Arizona Governor Katie Hobbs (D) vetoed the opt-in on January 16. North Carolina’s governor also vetoed. New Mexico, Oregon, and Wisconsin Governor Tony Evers (D) refused participation.

Families in Texas and Florida — both states with established private school scholarship programs and Republican-led governments — should verify current opt-in status with their state education agency, since the list of participating states continued to expand through spring 2026.

Once a state opts in, the next practical question is whether a qualified SGO in that state has been approved, is accepting applications, and serves your area. The IRS is expected to publish an approved SGO list as 2027 approaches.

What This Means for Families Comparing Schools

The FSTC does not change how public schools are funded or how they perform — it creates a parallel private funding channel. Families already weighing public versus private options now have a new variable: whether scholarship availability closes enough of the tuition gap to change the decision.

For families in states like Georgia or Mississippi, where confirmed early opt-ins combine with existing private school scholarship infrastructure, the path from application to award will likely be smoother in 2027 than in states standing up SGO systems from scratch.

Families considering a move should also factor participation status into the calculus. A state with a confirmed opt-in offers a concrete financial tool that a non-participating state does not.

Next Steps

The credit takes effect January 1, 2027. Between now and then, the practical moves for families and donors:

• Confirm your state’s participation status through your state education agency or the IRS FSTC portal, expected to launch in late 2026.
• Identify approved SGOs in your area once the IRS publishes the official list.
• Compare public school options in your district as a baseline — knowing how nearby public schools rank helps calibrate whether a scholarship changes the calculus.

Browse public school data and district comparisons by state on MySchoolScout:

• Texas schools and districts
• Florida schools and districts
• Virginia schools and districts
• Georgia schools and districts
• Mississippi schools and districts

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This article is informational and does not constitute tax or legal advice. Tax laws change and individual circumstances vary. Consult a qualified tax professional before making contributions or claiming the credit.