Jun 13, 2026
You don’t usually get to choose where your federal taxes go once they leave your paycheck.
A new credit changes that for up to $1,700 of your bill. Starting with the 2027 tax year, you can route that money to a private scholarship fund instead of the U.S. Treasury and claim back every dollar of it — if the right state has agreed to let you. So far, 23 of them haven’t.
Advertisement
Nearly half the country is sitting this one out. The Internal Revenue Service (IRS) reported this month that 27 states have signed on to the Federal Scholarship Tax Credit (FSTC), created under the One Big Beautiful Bill Act — which means 23 states haven’t yet joined. The states that joined are mostly Republican: Texas, Florida, Georgia, the Dakotas. The holdouts tend to be Democratic.
IRS Chief Executive Officer Frank J. Bisignano said the agency is “hopeful that additional states will decide to participate.”
Why some states signed on while others stalled changes how much the credit is worth to you.
What the $1,700 credit actually does
The credit is dollar for dollar. Donate $1,700 in cash to a qualified scholarship-granting organization, and your federal tax bill drops by the full $1,700 on what you owe — not a trim to the income you’re taxed on. That makes it far more valuable than a deduction.
It reimburses itself, so don’t mistake it for found money. You’re redirecting up to $1,700 you’d owe anyway; the appeal is getting to send a portion of your federal taxes to a cause you choose instead of the general fund.
There are limits to it though. The credit is nonrefundable. It can erase what you owe but won’t pay out beyond it. Though if you don’t use it all this year, you can carry it forward for up to five years.
You can’t claim both the $1,700 credit and a charitable donation deduction for the same gift — you have to pick one. And it’s for individuals only, so a company that writes the check can’t use it.
Advertisement
The scholarships go to students whose family income is below 300% of their area median income. They can cover private school tuition, tutoring, special needs services, supplies or transportation for public and private school students alike.
Must Read
- You can now build wealth like a landlord for as little as $100 — and no, you don't have to chase down rent or take 3 A.M tenant calls
- Goldman Sachs used to hoard prime real estate deals for the ultrarich. Two ex-analysts just opened the door for $250
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Why nearly half the states are holding back
The credit is federal, but states have to opt in before their scholarship organizations can accept the money. That call falls to the governor or another official the state designates.
The objections are substantive. Opponents say the program steers support toward private schools while public school budgets are squeezed. Zahava Stadler, project director of the Education Funding Equity Initiative at New America, warned that states opting in early are “getting ahead of the law,” signing up before they know their students’ civil rights will be protected. In April, Democratic Senators Mark Kelly of Arizona and Mazie Hirono of Hawaii introduced a bill to repeal the credit outright.
But a joint fact sheet from the U.S. Department of the Treasury and the U.S. Department of Education says the credit “does not divert money from local or state taxes, which make up the large majority of school funding.”
Most Republican governors signed on fast. In Kansas, Kentucky and now North Carolina, Republican-led legislatures voted to opt in over their Democratic governors’ objections. North Carolina’s case is different, though — Governor Josh Stein didn’t oppose the credit. He said he meant to opt the state in himself once the Treasury issued “sound guidance,” but the General Assembly overrode his veto on June 3, nearly 10 months later, before that guidance arrived.
Advertisement
Other Democractic governors have outright said they won’t opt in, including Oregon’s Tina Kotek, New Mexico’s Michelle Lujan Grisham and Wisconsin’s Tony Evers. Others are waiting on the IRS’s final rules, which aren’t written yet.
But the split isn’t a clean party line. Colorado Governor Jared Polis was the first Democrat to opt in voluntarily, and said the state shouldn’t leave money on the table. If other states pass on it, he added, Colorado should “go after their donors.” New York Governor Kathy Hochul has also said she intends to join.
The catch if your state isn’t on the list
Living in one of the 23 holdout states doesn’t lock you out of the credit, but it changes where your money goes.
Any U.S. taxpayer can still claim the $1,700 by giving to a scholarship organization in a participating state. What you can’t do is keep the benefit local — your dollars fund scholarships for children somewhere else, and families in your own state can’t receive these scholarships at all.
In a state that doesn’t opt in, a taxpayer’s money “would go to a scholarship organization that doesn’t operate within their state,” American Federation for Children Chief Executive Officer Tommy Schultz said.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
What this means for your money
Nothing changes on the return you’ll file next spring. The credit applies to contributions starting in 2027, which you’d claim on your 2027 return filed in 2028. So it’s not a this-year move.
If you’re considering using it, know that:
- First, you have to owe federal taxes. The credit isn’t refundable, so it wipes out what you owe but won’t give you money back. And unused amounts carry forward for up to five years.
- Second, the scholarship organization has to be on your state’s IRS-approved list if your state signed up, and each state submits its own, so check before you donate.
- Third, decide where you want the money to go. If your state hasn’t signed up, you still get the full credit, but the scholarship helps students elsewhere.
Treat this as redirecting up to $1,700 of taxes you’d pay anyway. Whether it stays in your community depends on whether your state signed up.
You May Also Like
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
- Robert Kiyosaki issues grim warning for baby boomers. Many could be ‘wiped out’ and homeless ‘all over’ the country. How to protect yourself now
Godwin Oluponmile is a content specialist, SEO strategist and copywriter with seven years of expertise in finance, Web 3.0, B2B SaaS and technology. His work has been featured in publications such as Entrepreneur, HackerNoon, Blocktelegraph and Benzinga.
