Scholarship Tax Credits Get Boost By Feds, Georgia Expands Education Savings

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Federal Tax Credit for Scholarship Program Gets Widespread Support

A popular state tax break has been added at the federal level by Public Law 119-21 (the “OBBBA”), the Federal Scholarship Tax Credit. Beginning in 2027, the law allows a federal income tax credit of up to $1,700 for contributions to a state-designated scholarship-granting organization. States have to opt in to the federal program, and the IRS has announced that 27 states have already elected to participate. At the state level, Georgia has expanded the state deduction for 529 plans. Let’s explore these changes.

Federal Tax Credit

The $1,700 federal credit is per taxpayer per year, for cash contributions to a qualified Scholarship Granting Organization. These state-based organizations provide scholarships for elementary and secondary education expenses at public, private or religious schools. The monies must be used to fund scholarships to eligible students solely within the state where the organization is listed. For example, one of Georgia’s organizations is the Georgia Student Scholarship Organization.

The tax credit is not refundable, meaning it can only offset actual tax liability, not generate a refund. If a taxpayer cannot use the entire $1,700 credit in a year, the unused portion may be carried forward for 5 years.

Also, taxpayers cannot double dip. The credit must be reduced by any amount claimed by a taxpayer on a state return, and the same amounts cannot be deducted as a federal charitable contribution.

Eligible Students

Although the IRS characterizes the new credit as being for scholarships “…that serve elementary and secondary school students from low- and middle-income families…”, covered students include students from households earning 300% of Area Median Income (AMI), as defined by the U.S. Department of Housing and Urban Development (HUD). For example, for the Fulton County, Atlanta, Georgia area, the household income limit would be $117,800 x 300% or $353,400. Private school choice advocacy groups estimate that this income restriction will allow 90% of students to be eligible.

Each scholarship-granting organization can add its own rules (age, grade level, specific schools served) but there are federal and state rules against self-dealing, including no directing of a given contribution to a specific child and other related-party rules. In addition, for the federal credit, qualified state organizations must be classified as public charities under Sec. 501(c)(3) of the Code.

How to Make a Donation

Taxpayers donate cash to a qualified state organization, not directly to a state. To prove the donation, a taxpayer should get a receipt or written acknowledgment showing the amount and date of the gift.

The steps are:

Pick an eligible SGO in a participating state.
Make a cash donation to that organization.
Get contemporaneous written acknowledgment.
Claim the credit on the federal return

Eligible States

So far, the following states have formally opted into the program: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

The IRS will maintain an official list of currently participating states at Federal Scholarship Tax Credit. Each state should also have its election notice on the state’s department of revenue or tax agency, and the governor’s office.

Georgia Opts In and Expands its 529 Plans

Meanwhile, Georgia has increased the maximum contribution limit for Path2College 529 Plan accounts from $235,000 to $550,000 for a single beneficiary. State Senate bill S556 also allows Georgia taxpayers to take a state income tax deduction for out-of-state 529 plans. Previously, the Georgia deduction was only available for contributions to the in-state Path2College plan.

The deduction is limited to $2,000 per beneficiary for single taxpayers and $4,000 per beneficiary for marrieds filing jointly. The total combined deduction for contributions to both the Georgia 529 plan and qualified out-of-state plans is limited to $4,000 per beneficiary for single taxpayers and $8,000 per beneficiary for married filing jointly.

Conclusion

These enhancements to tax benefits for education savings and charitable contributions give taxpayers new flexibility in designing their giving priorities. Because there are multiple options that cannot overlap, it is important to get tax advice from your Frazier & Deeter advisor to help you decide what best serves your financial goals.

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