IRS Announces 27 States to Participate in New $1,700 Scholarship Tax Credit, Leaving 23 States Out

WASHINGTON – The Internal Revenue Service announced on June 8, 2026, that 27 states have formally elected to participate in the new Federal Scholarship Tax Credit program, which is set to take effect on January 1, 2027. The program will allow individual taxpayers to claim a dollar-for-dollar federal tax credit of up to $1,700 for contributions to qualified Scholarship Granting Organizations (SGOs). However, the voluntary nature of the program means taxpayers in the 23 states that have not yet opted in will be excluded from the benefit.

This immediate split between states creates a new wrinkle in federal tax planning. For business owners and their employees, where you live now directly impacts access to this significant federal benefit.

The new tax credit, established under Section 25F of the Internal Revenue Code, was signed into law in July 2025 as part of the Working Families Tax Cuts Act. Unlike a tax deduction, which lowers a taxpayer’s taxable income, a tax credit directly reduces the amount of tax owed. This makes the new provision a potentially powerful tool for any individual with a federal income tax liability.

For a taxpayer to claim the credit, they must make a cash contribution to an SGO located in a state that has officially chosen to participate in the federal program. According to the IRS news release, IR-2026-76, state participation is entirely voluntary. Each participating state must submit a list of its qualified SGOs to the IRS.

As of the announcement, the 27 states that have opted into the program are: 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.

This list notably excludes 23 states and the District of Columbia, including major economic hubs such as California, New York, Illinois, and Massachusetts. Residents in these non-participating states will be unable to claim the federal credit for any donations they make, even if they contribute to an SGO in a participating state. The law requires the SGO to be in a state that has formally joined the program.

In our experience, a dollar-for-dollar federal credit is a powerful tool for managing tax liability. We see this as a strategic opportunity for clients in the 27 participating states to redirect tax dollars toward a community cause while reducing their own burden. However, coordinating this new federal program with existing state-level charitable rules requires careful analysis to ensure compliance and maximize the financial benefit. This is precisely where our tax preparation and compliance services become critical. For guidance on how this new credit impacts your specific tax situation, business owners and individuals can contact C&S Finance Group LLC at csfinancegroup.com.

The SGOs at the center of the program are nonprofit organizations that accept qualified contributions and use the funds to provide scholarships for K-12 students. These scholarships can cover a range of qualified elementary and secondary education expenses, including tuition, academic tutoring, classroom supplies, and fees for private or public schools. While the tax credit for an individual donor is capped at $1,700 annually, the scholarship amounts awarded to students are not capped and will be determined by each SGO based on its mission and available funds.

The federal program builds on a model that already exists in many states. State-level tax credit scholarship programs have operated for years, allowing individuals and corporations to receive state tax credits for similar donations. The new federal credit is designed to be a national expansion of this school-choice-oriented policy.

For taxpayers in the participating states, the change will be concrete starting with the 2027 tax year, which will be filed in 2028. They will be able to reduce their federal tax bill by the exact amount of their contribution to an approved SGO, up to the $1,700 limit. The law specifies that a donor claiming the federal credit may not also claim a state tax credit or a federal charitable deduction for the same contribution, preventing so-called “double-dipping.”

While the $1,700 cap per taxpayer seems modest, for a business whose employees in a participating state take advantage of it, the collective impact is notable. The key is understanding the rules to ensure donations are made correctly to qualified organizations.

In its announcement, the IRS stated it was “hopeful that additional states will decide to participate.” The agency will maintain and update the official list of participating states as they complete the election process. With the program's start date still several months away, the key development to watch will be whether any of the 23 non-participating states choose to opt in, which would expand access to this new tax benefit to millions more taxpayers.