Silver Linings: New K12 scholarship tax credit program
The Big B******** Bill was signed into law on July 4th, codifying much of this White House’s agenda, allocating a unprecedented amounts of money to ICE and CBP while cutting SNAP and Medicaid access. Pretty grim stuff.
But silver linings! Let's talk about a cool way to support K-12 education and potentially get a benefit on your taxes: the federal scholarship tax credit program. It might sound a bit complex, but it's actually quite straightforward when you break it down.
So, What Exactly Is It?
In a nutshell, this program offers a federal tax credit of up to $1,700 for individuals who make qualified contributions. What are these contributions for? They go towards setting up scholarships for students in kindergarten through 12th grade (K-12).
It's important to know that this isn't a deduction; it's a credit, which means it directly reduces the amount of tax you owe, dollar-for-dollar, up to that $1,700 limit. If you also get a credit on your State tax return for the same contribution, your federal credit will be reduced by that amount. Also, you can't double-dip: if you claim this credit, you can't also claim the contribution as a charitable deduction. Good news, though: if you contribute more than you can claim in one year, you might be able to carry forward the unused credit for up to five years.
Who Can Get These Scholarships?
These scholarships are specifically designed for "eligible students". To be considered eligible, a student must meet a couple of key criteria:
Their household income, for the year before they apply, must be no more than 300% of the area median gross income (AMI). This ensures the scholarships help families who truly need the financial support. In Santa Monica, that would be incomes below $329,217.
The student must also be eligible to enroll in a public elementary or secondary school. This basically means they're of K-12 school age and meet public school enrollment criteria.
The organizations granting these scholarships (more on them in a moment) are required to verify the student's annual household income and family size to make sure they meet these requirements.
What Can the Scholarship Money Be Used For?
The scholarship funds must be spent on "qualified elementary or secondary education expenses." This is pretty broad and covers many costs associated with attending elementary or secondary school, whether it's a public, private, or religious school.
Here's a list of what the scholarship money can generally cover:
Tuition.
Curriculum and instructional materials, including books and online educational resources.
Tutoring or educational classes outside the home, as long as the tutor/instructor is licensed or has teaching experience.
Various fees, uniforms, and transportation costs related to enrollment or attendance.
Fees for nationally standardized achievement tests, advanced placement exams, or college/university admission exams.
Fees for dual enrollment in a higher education institution (like a college course taken while still in high school).
For students with special needs, it can cover specialized services necessary for their attendance, specifically including occupational, behavioral, physical, and speech-language therapies starting from academic year 2026.
It's great to see that these scholarships are inclusive and can indeed benefit public school students, not just those in private or religious schools, as long as the expenses fall under the "qualified" category.
Who Grants the Scholarships?
The scholarships are given out by organizations known as "scholarship granting organizations" (SGOs). These aren't just any organizations; they have to meet specific federal requirements:
They must be a 501(c)(3) organization and exempt from tax, but they cannot be a private foundation.
They need to keep the scholarship contributions separate from their other funds, using one or more separate accounts exclusively for these "qualified contributions".
A key rule: an SGO must provide scholarships to 10 or more students who do not all attend the same school. This means a single school, generally, cannot be its own SGO for its own students, because all those students would, by definition, attend the same school.
SGOs must spend at least 90% of their income on scholarships for eligible students.
They can't use the funds for non-qualified education expenses.
They must prioritize scholarships for students who received one the previous year, and then for their siblings.
Contributions cannot be "earmarked" or set aside for a particular student; the SGO must have full discretion over who receives the scholarship.
As mentioned, they must verify student income and limit awards to those under the 300% AMI threshold.
They are prohibited from awarding scholarships to "disqualified persons," essentially preventing self-dealing.
Finally, the SGO must be included on a list provided by a "covered State" – meaning a state (or D.C.) that has voluntarily chosen to participate in this federal program.
When Does This Take Effect?
To adopt the scholarship tax credit for contributions of individuals to scholarship granting organizations, a State must voluntarily elect to participate in the program
Here are the key actions and requirements for a State:
Provide a List of Organizations: Not later than January 1 of each calendar year (or as early as practicable for the first calendar year the section applies), a State that voluntarily elects to participate must provide the Secretary with a list of scholarship granting organizations that meet the specified requirements and are located in that State
Certification: Each list submitted by the State must include a certification that the individual, agency, or entity submitting the list on behalf of the State has verified that each scholarship granting organization on the list meets the requirements of the section
Election Process: The election to participate must be made by the Governor of the State or by another individual, agency, or entity designated under State law to make such elections on behalf of the State with respect to Federal tax benefits
The scholarship granting organizations themselves must meet specific requirements to be included on the State's list, such as being a 501(c)(3) organization (but not a private foundation), preventing co-mingling of qualified contributions, and adhering to rules regarding scholarships provided to eligible students
The tax credit itself generally applies to taxable years ending after December 31, 2026. For the students, the scholarship amounts they receive are excluded from their gross income for amounts received after December 31, 2026.
This program provides a valuable opportunity for individuals to support K-12 education while also benefiting from a federal tax credit, helping families access important educational resources.
