Tax Credit for Contributions of Individuals to Scholarship Granting Organizations

What the document says

“there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the aggregate amount of qualified contributions made by the taxpayer during the taxable year.”

The section adds a new section 25F to subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 allowing an individual who is a citizen or resident of the United States within the meaning of section 7701(a)(9) a credit equal to the total qualified contributions made in the taxable year.

What the document says

“The credit allowed under subsection (a) to any taxpayer for any taxable year shall not exceed $1,700.”

The section caps the credit at $1,700 for a taxpayer for a taxable year and reduces it by any credit allowed on the taxpayer's State tax return for qualified contributions made in the same year.

What the document says

“The term `eligible student' means an individual who--”

The section defines a covered State as one of the States or the District of Columbia that for a calendar year chooses to take part and to identify scholarship granting organizations in the State. An eligible student is someone in a household whose income for the calendar year before the scholarship application is no more than 300 percent of the area median gross income as that term is used in section 42, and who may enroll in a public elementary or secondary school. A qualified contribution is a charitable gift of cash to a scholarship granting organization that uses it to fund scholarships for eligible students only within the State where it is listed. A qualified elementary or secondary education expense is any expense of an eligible student described in section 530(b)(3)(A).

What the document says

“which prevents the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts exclusively for qualified contributions,”

The section defines a scholarship granting organization as one described in section 501(c)(3) and exempt under section 501(a) that is not a private foundation, keeps qualified contributions in one or more separate accounts, meets the requirements of subsection (d), and appears on the list the covered State submits for the year.

What the document says

“such organization spends not less than 90 percent of the income of the organization on scholarships for eligible students,”

The section requires the organization to give scholarships to ten or more students who do not all attend the same school, to spend at least 90 percent of its income on scholarships for eligible students, not to fund anything but qualified elementary or secondary education expenses, to give priority first to students awarded a scholarship the previous school year and then to eligible students with a sibling awarded one, not to earmark contributions for a particular student, and to verify household income and family size and keep awards within the income limit. It may not award a scholarship to a disqualified person, worked out under rules similar to section 4946.

What the document says

“Any qualified contribution for which a credit is allowed under this section shall not be taken into account as a charitable contribution for purposes of section 170.”

The section provides that a qualified contribution for which the credit is allowed is not counted as a charitable contribution under section 170 of the Internal Revenue Code of 1986.

What the document says

“No credit may be carried forward under this subsection to any taxable year following the fifth taxable year after the taxable year in which the credit arose.”

The section lets credit above the limit in section 26(a), reduced by other credits allowable under the subpart other than sections 25F, 23 and 25D, be carried to the next taxable year and added to the credit for that year, but not past the fifth taxable year after the year the credit arose, with credits treated as used first in first out.

What the document says

“a State that voluntarily elects to participate under this section shall provide to the Secretary a list of the scholarship granting organizations that meet the requirements described in subsection (c)(5) and are located in the State.”

The section requires a State that chooses to take part to give the Secretary, by January 1 of each calendar year or as early as practicable in the first year, a list of the scholarship granting organizations in the State that meet the definition. The election is made by the Governor or by whoever State law designates for federal tax benefits, and each list must carry a certification that the submitter has authority to do so. The Secretary must issue guidance, including on enforcing the requirements and on recordkeeping and reporting.

What the document says

“gross income shall not include any amounts provided to such individual or any dependent of such individual pursuant to a scholarship for qualified elementary or secondary education expenses of an eligible student which is provided by a scholarship granting organization.”

The section adds a new section 139K to part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 leaving out of gross income amounts given to an individual or a dependent under a scholarship for qualified elementary or secondary education expenses of an eligible student, provided by a scholarship granting organization, with the defined terms taking their meaning from section 25F(c).

What the document says

“Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after December 31, 2026.”

The section applies its amendments to taxable years ending after December 31, 2026, and applies the exclusion from gross income to amounts received after that date in taxable years ending after it.