Most individual tax planning strategies trade a dollar of spending for a fraction of a dollar in tax savings. A new federal credit starting in 2027 works differently. Give up to $1,700 in cash to an approved scholarship organization, and your federal income tax can drop by the same $1,700. On October 1, 2026, the IRS proposed the regulations that explain how it will work, and the details matter for anyone in California.
What the federal scholarship credit is
The One Big Beautiful Bill Act added the credit as section 25F of the tax code. The IRS calls it the Federal Scholarship Tax Credit, and it is often called the Education Freedom Tax Credit. It rewards cash donations to scholarship granting organizations, which are charities that fund scholarships for kindergarten through 12th-grade students. According to IRS news release IR-2026-117, the credit begins January 1, 2027.
The income test in the law applies to the students, not to you. Scholarships go to students whose household income is no more than 300% of the area median. The statute sets no income limit on the donor, so high-income taxpayers can claim the credit too.
A credit, not a deduction
A deduction lowers the income your tax is figured on. A credit lowers the tax itself. That difference is the whole appeal here.
Take an invented donor in the 35% federal bracket who owes $10,000 of federal income tax for 2027. If they give $1,700 to an ordinary charity, and assuming they itemize and can deduct the full gift at that rate, the deduction saves about $595 ($1,700 x 35%). If they give the same $1,700 to an approved scholarship organization and claim the credit, their tax drops to $8,300, a $1,700 saving. You cannot have both: the proposed regulations say an amount that earns the credit cannot also be deducted as a charitable contribution.
The rules in the proposed regulations
Treasury and the IRS published the proposed rules on October 2, 2026. These are the points that affect donors most:
- Up to $1,700 per person. A married couple filing jointly can claim up to $3,400, but only if each spouse makes their own qualified donation of up to $1,700, made and documented in that spouse's name.
- Cash only. Currency, check, money order, card or bank transfer, and after-tax payroll deduction count. Stock, other property and digital assets do not.
- You must designate the gift as a qualified contribution when you make it, and the designation cannot be changed later.
- The credit is nonrefundable. It can reduce your tax to zero but not below, and any unused amount carries forward for up to five years.
- A state tax credit for the same gift is subtracted first, before the $1,700 cap applies.
- The specific organization must be on the IRS list of approved scholarship organizations when you give. The proposed rules let you rely on that list.
The designation rule is the one most likely to cost people the credit. A generous year-end check to a scholarship charity, written without saying it is a qualified contribution, is just a charitable gift. Ask the organization how it records the designation before you give, and keep the receipt that shows it.
The paperwork continues after the gift. Under the proposed regulations, the organization must send you a written acknowledgment with a unique donor number by January 31 of the following year, and you report that number on IRS Form 8525 when you claim the credit. If the number is missing from your return, the IRS presumes the gift did not qualify unless you can show the acknowledgment. Keep it with your tax records.
California residents can still claim it
States have to opt in by electing to participate and sending the IRS a list of approved organizations. As of September 14, 2026, the IRS Federal Scholarship Tax Credit page listed 30 participating states. California was not one of them.
That does not shut California residents out. The proposed regulations say you can give to an approved organization in any participating state without regard to where you live, and the IRS uses the example of a resident of one state giving to an organization on another state's list. A Torrance family can give to an approved organization in Nevada or Texas and claim the same federal credit as a donor there. A state's participation alone does not make every scholarship charity in that state eligible, though. The specific organization has to be on the IRS list for the year you give.
Two cautions. The list of participating states is set each year, so check it in the year you give. And because California has not adopted this credit, do not assume the gift gets any special treatment on your California return.
Where this credit fits in your individual tax planning strategies
For many households this will be one of the simplest wins available: a fixed amount, a single cash gift, and no income ceiling. Planning still matters. You need enough federal income tax to use the credit, both spouses have to give to reach $3,400, and the gift has to be designated correctly at the time it is made.
The rules are also still proposed. The IRS is taking comments and has scheduled a public hearing for December 15, 2026, so details can change, and final rules may not be out by January 1. This article reflects IRS guidance available as of October 16, 2026. Before you give in 2027, check the latest IRS guidance, confirm the organization is approved for that year, and ask your tax advisor if any requirement is still unclear.
This credit is a small piece of the bigger plan, but it is a clean one, and it belongs in your individual tax planning strategies for 2027 alongside the larger decisions in a year-round tax plan. If you want help fitting it in, Schedule a tax planning consultation and our team will walk through it with you.
