State Tax Credits for K-12 Scholarships Explained | ACE

Your CPA mentions it in passing: a new federal tax credit for education scholarships launches in January 2027. You Google it. But the first three results are political, so you close the tabs.

Here’s what those results missed. Dollar-for-dollar tax credits for K-12 scholarships aren’t a 2027 invention. States have run them quietly for two decades. ACE Scholarships has operated state tax credit scholarship programs for more than a decade. The federal Education Freedom Tax Credit (EFTC) is best understood as this same proven mechanism scaled to a national level.

If you want to understand the EFTC before your next year-end planning meeting, start here: how the state version works, where it already exists, and what changes (and what doesn’t) when the federal credit arrives.

Quick Facts

• State tax credit scholarship programs are active in more than 20 states right now
• Contributions themselves are private dollars, though the federal credit does reduce federal tax revenue
• The federal EFTC applies to contributions made on or after January 1, 2027, and offers a dollar-for-dollar credit of up to $1,700 per taxpayer, regardless of filing status (CRS R48724)
• Unused federal credits carry forward five years
• Students must be from households at or below 300% of area median gross income to qualify for EFTC-funded scholarships (CRS R48724)
• Donors cannot direct contributions to their own children

What Is a State Tax Credit Scholarship Program?

A state tax credit scholarship program lets a taxpayer redirect part of their state tax liability, dollar for dollar, into a private donation that funds K-12 scholarships. Instead of going to the general fund, the money flows to a nonprofit Scholarship Granting Organization (SGO), which then awards scholarships to eligible students attending private schools of their family’s choosing.

Dollar-for-dollar means exactly what it says. If you owe $1,000 in state taxes and your state allows a $1,000 credit for contributions to a qualifying SGO, your tax bill drops by $1,000, and a student receives scholarship funds. It’s not a deduction that reduces your taxable income by $1,000 and saves you a fraction of that amount. It’s a full, one-to-one offset of what you owe.

In Montana, Arkansas, Kansas, and Louisiana, qualifying donors can contribute to ACE as a certified SGO and receive a state tax credit in return. Those contributions fund scholarships for students attending ACE Partner Schools. The mechanism is the same across all states, though credit caps, income thresholds, and program rules vary by state law.

This is a shared-responsibility funding model. Families contribute toward private school tuition and ACE provides scholarship funds. Partner schools keep their costs accountable.

Donors redirect tax dollars they were already going to pay. No one in that chain receives something for nothing, which is exactly why the model has worked for two decades. State tax credits for K-12 scholarships aren’t a pilot; they’re a proven, decade-tested tool that SGOs like ACE have used to deliver scholarships to tens of thousands of individual students attending private school.

State Credits Vs. the Federal Education Freedom Tax Credit

The core mechanism is identical: a donor makes qualified contributions to a certified SGO and receives a dollar-for-dollar federal tax credit or state tax credit in return. The differences are in scope, eligibility, and timing.

A state tax credit scholarship program is state-specific. It runs under state law, applies to state tax liability, and is already active in states that have passed enabling legislation. If you live in Arkansas and contribute to ACE Scholarships’ Arkansas state tax credit program, you claim the credit on your Arkansas return. Scholarship granting organizations operating in those states are already certified, already deploying funds, and already producing measurable outcomes for eligible students.

The federal Education Freedom Tax Credit (EFTC) is a separate mechanism operating at the federal level. It applies to federal tax liability, not state. It covers contributions made on or after January 1, 2027, which a taxpayer would generally claim on the 2027 federal return filed in 2028.

The credit is dollar-for-dollar up to $1,700 per taxpayer, regardless of filing status, so a joint return does not automatically double it. It’s nonrefundable (meaning it reduces what you owe but doesn’t generate a refund beyond your liability), and unused credits carry forward five years. Scholarships are limited to students eligible to enroll in a public elementary or secondary school whose household income does not exceed 300% of area median gross income, and participating states submit annual lists of qualifying SGOs (CRS R48724). Donors cannot direct contributions to benefit their own children.

The contributions themselves are private dollars, given voluntarily, and that is a real difference from a voucher program funded by direct appropriation. It is worth being precise about the rest, though: a tax credit reduces federal revenue, and the Congressional Research Service estimates the EFTC will reduce federal revenues by roughly $26 billion between FY2025 and FY2034 (CRS R48724). The honest framing is that the money is privately given and federally subsidized, not that it costs the public nothing.

For a deeper look at how the federal credit works on its own terms, ACE’s Education Freedom Tax Credit hub covers the full federal mechanics, and the EFTC FAQs answer the questions donors ask most.

A state credit and the EFTC are two separate rulebooks. Understanding that distinction is what lets you have a precise conversation with your CPA rather than a vague one.

Where State Tax Credit Scholarship Programs Exist Today

ACE’s four state-credit programs are the most direct entry point for donors who want to participate before the federal EFTC launches.

• Arkansas, Kansas, Louisiana, and Montana each have active programs where ACE serves as a certified SGO. Eligible donors in those states can contribute now, receive a state tax credit, and fund scholarships for students at ACE Partner Schools.

Beyond ACE’s footprint, more than 20 states run their own tax credit scholarship programs under varying names and structures.

• Florida’s tax credit scholarship program is one of the largest in the country by enrollment, and scholarship granting organizations there provide scholarships covering private school tuition, fees, tutoring, transportation, curriculum materials, and other educational expenses for eligible students.
• Arizona, Georgia, and Pennsylvania have long-running programs as well. Each state sets its own credit cap, income eligibility rules, and approved SGO list, so the details vary considerably from one covered state to the next.

If you live outside ACE’s four state-credit states, the first practical step is checking whether your state runs a program at all. EdChoice’s school choice overview tracks programs by state, and the Congressional Research Service’s report on the federal program is the authoritative starting point on how the federal credit interacts with them.

One clarification: ACE operates across the country, but not every state where ACE works has a tax credit scholarship mechanism. Some use different funding models. The four states listed above are specifically the ones where ACE functions as a certified SGO for a state tax credit program.

Checking your own state’s program status is a five-minute step that tells you whether there’s an immediate opportunity on your 2026 return, well before the federal credit arrives.

How a State Credit and the Federal EFTC Can Work Together

For donors in one of ACE’s four state-credit states, the natural question is whether a state credit and the federal EFTC can both be claimed on the same contribution. The statute answers it, and the answer is worth knowing before 2027.

They do not stack. The federal credit is reduced by the value of any state tax credit received for the same donation, and a taxpayer who claims the federal credit cannot also take an itemized charitable deduction for that contribution (CRS R48724). Operational details are still being written: Treasury has said proposed regulations will set out the rules for states, SGOs, taxpayers, compliance and reporting ahead of the 2027 start (Treasury). The no-double-dipping principle, though, is in the law itself, not waiting on guidance.

So the planning question changes shape. A donor in Arkansas giving to ACE as a certified SGO is not choosing how to claim two credits on one gift; they are deciding which mechanism to route a given contribution through, and in which year. For some donors the state credit will be the better instrument, for others the federal one, and for donors giving at higher levels there may be room to use both across separate contributions.

The carryforward provision on the federal side adds another layer of planning flexibility. If your federal tax liability in a given calendar year is less than the credit you’re entitled to, the unused amount carries forward for up to five years. That’s relevant for donors whose liability fluctuates, or who want to coordinate giving across calendar years.

None of this is a reason to guess. It’s a reason to bring a specific, well-framed question to your CPA: “Given that the federal credit is reduced by any state credit on the same donation, how should I split my 2027 giving between ACE’s state program and the federal EFTC, and how does the five-year carryforward fit my liability?” That’s a sharper question than most CPAs will hear this year.

FAQs: Tax Credits K-12 Scholarships

The mechanics of tax credit scholarships generate a consistent set of questions from donors who are new to the model. Here are the ones that come up most often.

What Is the Difference Between a Tax Credit and a Tax Deduction?

A tax deduction reduces your taxable income. If you’re in the 37% bracket and take a $1,700 deduction, you save roughly $629 in taxes. A tax credit reduces your tax liability directly, dollar for dollar. A $1,700 credit saves you $1,700. For the EFTC, the credit is nonrefundable, meaning it can reduce your federal tax bill to zero but won’t generate a refund beyond that (CRS R48724). The five-year carryforward exists precisely to handle situations where your liability in a given calendar year is less than the credit amount.

Can I Use a Donor-Advised Fund to Contribute to an SGO?

This is one of the most common questions from donors who already give through a DAF or private foundation. The answer requires care. A contribution from a DAF to an SGO may not qualify for the EFTC, because the tax benefit of a DAF contribution is typically taken at the time of the contribution to the DAF, not at the time of the grant. The IRS has not yet issued final guidance on DAF-to-SGO contributions under the EFTC, so this is a question your CPA or financial advisor needs to answer based on current guidance before you structure a gift that way.

Do States Have to opt in to the Federal EFTC?

Yes. States must opt in annually by January 1 for their students to receive funds from the EFTC. If a state doesn’t opt in, its residents can still claim the federal tax credit, but the money will leave the state and fund students in states that have opted in.

Who Qualifies to Receive a Scholarship Funded by the EFTC?

Eligible children must be from households at or below 300% of area median gross income and must be eligible to enroll in a public elementary or secondary school (CRS R48724). The scholarship supports qualifying educational expenses, which may include tuition, tutoring, technology, special needs services, and more. Donors cannot direct their contributions to benefit their own children or dependents.

How Do I Know If an SGO Is Legitimate?

Under the EFTC, participating states submit annual lists of qualifying SGOs (CRS R48724), and Treasury has said proposed regulations will set out the operational rules for states, SGOs, taxpayers, compliance, and reporting (Treasury). For state programs, each state maintains its own approved SGO list. ACE is a certified 501(c)(3) nonprofit with more than 25 years of operating history, 121,000+ scholarships delivered, and distributed over $395 million in total scholarships and ESAs. Its financials are audited, its outcomes are tracked, and its leadership is publicly named. Those are the signals worth checking for any SGO you’re evaluating.

H2: The Donor Who Arrives Prepared

The state tax credit scholarship model has been moving money into K-12 education for more than two decades.

What separates the donor who shows up in January 2027 with a clear plan from the one still sorting out the mechanics in March is preparation. That means understanding the state landscape now and having a specific conversation with your CPA about how the credit fits your existing giving strategy, whether that’s a DAF, a family foundation, or direct contributions. Federal policymakers built the carryforward and the opt-in structure to give donors and states time to participate thoughtfully. Use that time.

ACE has run four of those programs, supporting students across Arkansas, Kansas, Louisiana, and Montana. The federal EFTC scales the same logic to every eligible taxpayer across the country. The math is straightforward: a $1,700 dollar-for-dollar federal credit per taxpayer, reduced by any state credit claimed on the same donation, with a five-year carryforward for unused amounts.

If you’re ready to take the next step, claim your federal tax credit through ACE and put your contribution to work for a student who’s already waiting.

Questions about ACE’s state programs or the EFTC mechanics? Reach out to the ACE team directly at acescholarships.org.