The Federal Scholarship Tax Credit, explained.

What is Section 25F?

The Federal Scholarship Tax Credit, enacted under Section 25F of the Internal Revenue Code, is a new nonrefundable federal income tax credit that takes effect in 2027. It allows eligible taxpayers to claim a credit of up to $1,700 per individual or $3,400 per household for cash contributions made to approved Scholarship Granting Organizations (SGOs). SGOs are tax-exempt organizations that use contributions to provide scholarships for students attending accredited educational institutions.

Unlike a deduction that reduces taxable income, a tax credit directly reduces the amount of federal tax owed, dollar for dollar. Because the credit is nonrefundable, it can reduce a taxpayer's federal tax liability to zero but cannot result in a refund of any excess. Eligibility depends on the taxpayer's filing status, adjusted gross income, and total federal tax liability for the year.

Contributions must be made in cash to an SGO that has been approved and listed by the IRS. Taxpayers cannot claim the credit for contributions to private foundations, donor-advised funds, or directly to individual students. The credit is designed to encourage charitable giving for education while providing a meaningful reduction in federal tax burden for working families.

FSTC.ai makes this credit accessible through the workplace. Employers can offer FSTC.ai as a benefit at no cost, and employees can enroll in minutes to start contributing through payroll deductions. The platform handles eligibility estimation, contribution routing, and tax documentation automatically, so participating in Section 25F does not require custom tax infrastructure or a payroll overhaul.