Federal Scholarship Tax Credit Program
Beginning January 1, 2027, eligible individuals may receive a dollar-for-dollar federal income tax credit for qualifying contributions to approved Scholarship Granting Organizations. Under proposed Treasury and IRS guidance released October 1, 2026, the annual credit may be up to $1,700 per individual, or up to $3,400 for married couples filing jointly when each spouse makes qualifying contributions.
South Dakota has elected to participate in the program for 2027. South Dakota Partners in Education intends to participate as a Scholarship Granting Organization, subject to completion of all federal and state designation and certification requirements.
The new federal program will be completely separate from the South Dakota Insurance Premium Tax Credit Scholarship Program that SDPE currently administers. The existing state program remains unchanged.
SDPE is working to finalize an administrative service provider for its federal scholarship program. A new online portal dedicated to the federal program is being prepared and is expected to be available before January 1, 2027. Portal access and instructions will be posted here when ready. The existing state scholarship application process will remain separate.
IMPORTANT NOTICE
Information updated October 7, 2026. Treasury and the IRS released proposed regulations and separate temporary regulations for the Federal Scholarship Tax Credit Program on October 1, 2026. The broader proposed regulations are not yet final. The temporary regulations address certain definitions, state participation, SGO registration, and reporting requirements and take effect December 1, 2026. Additional guidance is expected. The proposal permits reliance beginning in 2027 when all applicable provisions are followed fully and consistently. SDPE’s participation remains subject to the required designation and certification. This information is provided for general educational purposes and is not tax or legal advice. Taxpayers should consult their own tax adviser.
FAQs
What is the Federal Scholarship Tax Credit Program?
The program was created under Section 25F of the Internal Revenue Code. Beginning in 2027, individual taxpayers may be able to receive a federal income tax credit for qualifying monetary contributions made to an approved Scholarship Granting Organization.
Scholarship Granting Organizations will use those contributions to provide scholarships for qualified K-12 educational expenses for eligible students.
Has South Dakota joined the federal program?
Yes. South Dakota has made an advance election to participate in the federal program for calendar year 2027.
The state must also provide the IRS with a certified list of Scholarship Granting Organizations eligible to participate. SDPE intends to seek inclusion on that list and is preparing to meet the applicable federal and state requirements.
Is SDPE already approved to accept federal tax-credit contributions?
Not yet. Although South Dakota has elected to participate, the required process for identifying and certifying participating Scholarship Granting Organizations has not been completed.
SDPE will provide additional information once its participation has been formally confirmed. Contributions intended to qualify for the new federal credit cannot be made before January 1, 2027.
How much is the federal tax credit?
Under proposed Treasury and IRS guidance, an eligible individual may receive a dollar-for-dollar federal income tax credit of up to $1,700 annually. Married couples filing jointly may potentially claim up to $3,400 when each spouse makes qualifying contributions of up to $1,700.
The annual credit limit applies across contributions to all Scholarship Granting Organizations. It is not a limit on how much someone may donate or the amount of a student’s scholarship.
The credit is nonrefundable. It can reduce federal income tax liability, but cannot reduce it below zero. Unused credit may generally be carried forward for up to five years, subject to applicable requirements.
The contribution amount for which a federal credit is allowed cannot also be claimed as a federal charitable deduction. Any state tax credit allowed for the same qualifying contribution reduces the amount eligible for the federal credit before the federal annual limit is applied.
Taxpayers should consult their tax adviser about their individual circumstances.
Who may contribute?
The federal credit is available to eligible individual donors who are U.S. citizens or residents. Under the proposed guidance, contributions made through a partnership or S corporation do not qualify for the individual federal credit through the owners.
SDPE anticipates accepting federal contributions by check, ACH, credit card, or another approved electronic payment method. As an SDPE payment policy, physical currency will not be accepted.
Instructions for making and documenting qualifying contributions will be published when SDPE’s participation and contribution procedures are confirmed.
Can someone outside South Dakota contribute to SDPE?
Yes. The proposed guidance allows eligible individuals to contribute to an approved Scholarship Granting Organization regardless of where the donor lives, including donors living in states that have not elected to participate.
Once SDPE’s federal participation is confirmed, eligible donors outside South Dakota may support its South Dakota scholarship program. Donor residence does not expand the geographic scope of SDPE’s scholarships.
What documentation will donors receive?
Under the Treasury and IRS temporary regulations, participating Scholarship Granting Organizations must provide donors with a written acknowledgment of qualifying contributions, including a unique donor number, by January 31 of the following year. Donors would use that number when claiming the credit on IRS Form 8525, or its successor. SDPE will publish detailed instructions before opening its federal contribution process.
When can contributions begin?
Qualifying contributions under the federal program may not be made before January 1, 2027. SDPE will announce its contribution process after all necessary federal and state requirements have been completed.
Who may qualify for a scholarship?
Under federal law, an eligible student generally must:
- Be eligible to enroll in a public elementary or secondary school.
- Be a member of a household with income that does not exceed 300 percent of the applicable area median gross income.
- Meet all other federal requirements and the scholarship policies established by the participating Scholarship Granting Organization.
SDPE is reviewing the proposed income-verification rules and will publish its federal income guidelines, required documentation, and application procedures before applications open.
Will homeschool or microschool students qualify?
The proposed guidance connects qualified educational expenses to a school providing kindergarten through grade 12 education as determined under state law. Treasury and the IRS have indicated that additional guidance on schools and qualified expenses is forthcoming.
SDPE’s planned initial federal program focuses on tuition scholarships at participating accredited private schools in South Dakota. SDPE has not announced a federal scholarship offering for homeschool or microschool arrangements.
What expenses will SDPE’s scholarships cover?
Federal law permits scholarships for certain qualified K-12 educational expenses. However, each Scholarship Granting Organization will establish its own scholarship program within federal requirements.
SDPE currently anticipates beginning its federal program with tuition scholarships for eligible students attending participating accredited private schools serving students in kindergarten through grade 12 in South Dakota. Final offerings will be announced after SDPE completes its review of the proposed guidance, approves its program policies, and receives the required designation and certification.
For its anticipated first-year federal program, SDPE has not approved computers, internet service, transportation, uniforms, room and board, tutoring, or other non-tuition expenses. Additional scholarship uses may be considered in future years, subject to federal requirements and SDPE policy.
When can families apply?
SDPE has not yet opened a federal scholarship application. The application schedule, participating-school requirements, income documentation, and scholarship amounts are still being developed.
Families should continue to check this page for official updates. Applying for or receiving a scholarship through SDPE’s existing state program will not automatically constitute an application for the federal program.
Are the state and federal scholarship programs the same?
No. They are separate programs.
SDPE’s existing South Dakota program is supported by contributions from participating insurance companies that receive a South Dakota insurance premium tax credit. It provides tuition scholarships under South Dakota law.
The new federal program will be supported by qualifying monetary contributions from individual taxpayers and will operate under separate federal requirements. Separate contribution, application, accounting, eligibility, and scholarship procedures will apply.
Where can I find official federal information?
For the latest federal information, visit the official IRS Federal Scholarship Tax Credit page.