On Nov. 26, the Internal Revenue Service (IRS), a bureau of the U.S. Treasury, issued a notice requesting comments regarding the implementation of the U.S. school choice tax credit scholarship (USTCS) program. The 2025 budget reconciliation bill, called the One Big Beautiful Bill Act (OBBBA), established the program when President Donald Trump (R) signed the bill into law in July.
The USTCS is a nonrefundable tax credit program through which individuals can receive federal tax credits up to $1,700 for donations to authorized scholarship-granting organizations (SGOs). SGOs are non-profit organizations that manage contributions from donors or grants for educational scholarships.
OBBBA requires the SGOs to distribute the donations to eligible families, who can use the money on a variety of private or public educational expenses, including private school tuition, tutoring services, and textbooks. In order to qualify for program scholarships, students must live in households earning no more than 300% of their area's median gross income and be eligible to enroll in K-12 schools.
For donors, the program permits individuals to lower their federal tax liability by $1 for every $1 donated to accredited SGOs up to $1,700. Taxpayers may donate more than that to SGOs, but they will not receive a tax refund for the additional amount. As established, there is not a cap on the total amount of credits the program can offer. To opt in to the program, states must submit a list of SGOs to the U.S. Treasury.
OBBBA requires the U.S. Treasury to issue regulations for the program, and on Nov. 26, the Internal Revenue Service (IRS) issued a notice requesting comments on proposed policies implementing the program.
The notice indicated the IRS's intention to set certain policies for the program, including the following:
- Requiring states to list all organizations located in the state that have requested to be designated as an SGO and that meet OBBBA's requirements for SGOs.
- Some debates about the program surround whether or not states should be able to tailor the program by authorizing specific SGOs that support specific educational sectors. SGOs may have specific focuses, like providing students with disabilities scholarships for educational expenses. SGOs already exist in many states; some SGOs provide services in multiple states. This guidance indicates that states may not have the authority to reject an SGO's participation in the program so long as it meets OBBBA's requirements.
- Defining income as all income of the organization — including unrelated business income — and not limiting the definition to qualified contributions segregated in separate accounts.
- OBBBA requires at least 90 percent of the organization's income to be spent on scholarships for eligible students. The IRS requested comments regarding whether this policy would pose practical challenges for SGOs and sought alternative ideas or interpretations of the statute on which the regulations were based.
- Requiring donors giving to SGOs that operate in multiple states to designate which state the scholarship funds will benefit.
- OBBBA requires a qualified contribution to be used solely within the state in which the organization is listed; this policy was designed to fulfill that statutory requirement for multistate SGOs. The IRS requested comments on how to implement other statutory requirements for multistate SGOs, including whether they should apply in the aggregate across all states or on a state-by-state basis.
- Requiring states to submit a list of SGOs and certification that each one is qualified by Jan. 1, 2027, and annually thereafter.
- The notice indicated that states may elect to opt in either before submitting, or by submitting a list of qualified SGOs to the U.S. Treasury; the entity electing to participate must certify that it has legal authority to opt in on behalf of the state.
The notice posed other specific questions regarding policies, procedures, record keeping, and other requirements for states and SGOs. It sought information from states already running tax credit programs similar to the USTCS on program specifics, including how states determine SGOs as located in the state.
The IRS will accept comments until Dec. 26, 2025, though it will consider written comments submitted after that date if doing so does not delay issuing guidance. The notice said the IRS intends to issue guidance in early 2026.
As of Dec. 5, one state — Nebraska — had taken official action to indicate participation, and North Carolina Gov. Josh Stein (D) vetoed legislation requiring state participation but said the state may still opt in. Governors of three states — Colorado, South Dakota, and Tennessee — said they would participate, but had not taken official action to opt in, and governors of three states—New Mexico, Oregon, and Wisconsin — said they would not participate.
To read more about the program, explore Ballotpedia's USTCS coverage.
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