Last week, we sorted throughsomeofthewordsbeing used in the school-choice conversation. We looked at vouchers, scholarships, tax credits, Education Savings Accounts, and grants. Now it is time to follow the money.
The new Federal Scholarship Tax Credit begins January 1, 2027. Oklahoma has chosen to take part in the program. At first glance, the plan may sound simple. A person donates money, receives a federal tax credit, and the money helps pay for a child's education. However, there are a few more steps between the donor and the student.
The first thing to understand is that the federal government will not send scholarship money directly to parents or choose which students receive scholarships. Instead, the program begins with individual taxpayers who choose to donate money to an approved Scholarship Granting Organization, or SGO.
An SGO is a nonprofit organization that collects donations and awards scholarships to eligible students. For a donation to qualify for the new federal tax credit, the organization must meet federal rules and be included on the list of approved SGOs submitted by a participating state. That means a person cannot donate $1,700 to just any school, charity, or scholarship fund and expect to receive the federal credit. The donation must go to an approved SGO.
Beginning in 2027, an individual taxpayerwhomakes an approved cash donation may receive a federal income tax credit of up to $1,700. A taxcreditreducestheamount of federal income tax a person owes. The credit is nonrefundable, which means it can reduce a person's federal income tax, but it cannot create a refund beyond the tax thatpersonowes.Federallaw allows an unused part of the credit to be carried forward for up to five years.
This is where one of the most important differences from last week's article comes into play. The $1,700 belongs on the donor's side of the program. It is the maximum federal tax credit available for an approved donation. It is not a $1,700 payment from the federal government to a parent, and it does not mean every student who receives a scholarship will receive $1,700.
The scholarship is a separate part of the process. After receiving donations, the SGO awards scholarships to eligible students. Federal rules requireanSGOtouseatleast 90 percent of its income for scholarships. An SGO must also provide scholarships to at least ten students, and those students cannot all attend the same school.
There is another important rule for donors and families to understand. A donor cannot give money to an SGO and tell the organization to use that donation for a particular child. The organization, not the donor, decides which students receive scholarships.
For example, imagine an Oklahoma taxpayer named John wants to take part in the program in 2027. John gives $1,700 in cash to an approved Oklahoma SGO. He may qualify for a federal income tax credit of up to $1,700. The SGO receives John's donation, combines it with other approved donations, and uses the money to provide scholarships to eligible students.
John does not choose a student to receive his $1,700. A parent does not apply to the federal government to collect John's $1,700. The SGO stands between the donor and the student. That is why understanding the role of a Scholarship Granting Organization is so important.
The scholarship money may be used for approved elementary and secondary education expenses. These can include tuition, fees, academic tutoring, books, supplies, and certain equipment. Other approved expenses may include some special-needs services, uniforms, transportation, and computer technology when they meet federal rules.
The new federal program is not only about helping with private-school tuition. The law covers certain education expenses for students attendingpublic,private,and religious schools. We will look more closely at who can receive these scholarships next week.Fornow,theimportant point is that the money does not automatically go from a donor to a private school.
Oklahoma also has a role in the process. States were given the choice of whether to participate in the federal program. Oklahoma chose to participate, and the IRS lists Oklahoma among the states that have made an advance election for 2027.
Oklahoma will also identify theScholarshipGranting Organizations that meet the requirements for the federal program. Those organizations must be included on the state's list before donations to them can qualify for the federal tax credit.
That gives us a fairly simple path to follow. An individual makes an approved donation to an SGO. The donor may receive a federal tax credit. The SGO collects donations and awards scholarships. Eligible students then use those scholarships for approved education expenses.
There is one more wrinkle. Oklahoma already has state programs that involve tax credits and education. Federal law includes rules that prevent a donor from receiving the full federal tax credit and a state tax credit for the same donation. If a taxpayer receives a state tax credit for the same approved contribution, the federal credit is reduced by the amount of the state credit.
That does not mean Oklahoma's existing education tax-credit programs are going away. It means parents, donors, and taxpayers need to pay attention to which program they are using because the rules are not all the same. We will return to Oklahoma's state programs later in this series.
For now, the easiest way to understand the new federal program is to remember that there are three different people or groups involved. There is the donor, who gives the money and may receive the federal tax credit. There is the Scholarship Granting Organization, which receives donations and awards scholarships. Then there is the student, who may receive a scholarship for approved education expenses.
Those three parts are connected, but they are not the same. The donor's tax credit is not the student's scholarship. Thefederalgovernment does not send a $1,700 check to each eligible family, and a $1,700 donation does not guarantee a particular student a $1,700 scholarship. Once we separate those pieces, the new program becomes much easier to understand.
The next question is probably the one most parents care about: Could my child qualify? Next week, we will look at which students may be eligible for a federal scholarship, what the household income rules mean, and why being eligible does not necessarily mean a student is guaranteed to receive a scholarship.