What Is the SGO Tax Credit, and How Does It Work With the EFTC?

A scholarship tax credit generally gives eligible taxpayers a credit for qualifying contributions to a Scholarship Granting Organization, or SGO, which uses those funds to provide education scholarships.

But not every scholarship tax credit works the same way.

Some states already operate scholarship tax credit programs under state law. Beginning with the 2027 tax year, the federal Education Freedom Tax Credit (EFTC), aka Federal Scholarship Tax Credit (FSTC), creates a separate federal tax credit under Internal Revenue Code Section 25F.

For financial and tax advisors, that distinction matters. A state SGO tax credit and the federal EFTC may involve different eligibility rules, credit limits, SGO requirements, and tax treatment.

What Is a Scholarship Granting Organization?

A Scholarship Granting Organization (SGO) is a nonprofit organization that receives qualifying contributions and uses those funds to provide scholarships for eligible students.

SGOs play a central role in both existing state scholarship tax credit programs and the new federal EFTC. However, an organization’s participation in a state program does not automatically qualify it for the federal initiative.

Under Section 25F, an SGO must satisfy federal requirements and be included on the applicable participating state’s list of qualifying SGOs. Existing state-level SGO status should not be treated as proof of federal EFTC qualification.

How Does a Scholarship Tax Credit Work?

The basic pathway is straightforward:

Taxpayer → SGO → scholarship funding → eligible students and education expenses

A taxpayer makes a qualifying contribution to an eligible SGO. The SGO then administers scholarship funds according to the rules of the applicable tax credit.

What Is the Federal Education Freedom Tax Credit?

The Education Freedom Tax Credit is a federal scholarship tax credit established under IRC Section 25F.

Beginning January 1, 2027, eligible individual taxpayers may claim a federal tax credit for qualifying cash contributions to qualifying SGOs. The federal credit is limited to $1,700 per individual taxpayer, or $3,400 for married couples filing jointly.

The credit is nonrefundable. It can reduce federal tax liability, but it does not independently create a refund when the credit exceeds that liability. Qualifying unused credit may generally be carried forward for up to five taxable years.

A state must also opt-in to the federal initiative and provide the required SGO information before contributions through organizations in that state can qualify under Section 25F.

How Is the EFTC Different From a State SGO Tax Credit?

The primary difference is which tax liability the credit applies to.

A state scholarship tax credit reduces an eligible state tax obligation according to that state’s law. The EFTC is a federal income tax credit governed by Section 25F.

Other differences may include:

• The maximum credit available
• Taxpayer eligibility
• SGO qualification requirements
• State participation rules
• Scholarship administration requirements
• Reporting and substantiation requirements

Advisors should evaluate the federal and state tax credits separately rather than treating the EFTC as a nationwide version of an existing state initiative.

Can a Taxpayer Claim Both a State Scholarship Credit and the EFTC?

A taxpayer may encounter both a state scholarship tax credit and the federal EFTC, but advisors should not assume the same contribution will generate the full value of both credits.

The same dollars cannot be used for taking more than one credit, so advisors would be wise to encourage their clients to pursue the maximum federal credit in its entirety, and then consider state credit options.

That coordination rule makes the details important. Advisors should consider the applicable federal law, state law, taxpayer liability, contribution structure, and qualification of the receiving SGO before reaching a client-specific conclusion.

This article provides general educational information and is not individualized tax advice.

What Should Advisors Verify for Clients?

When discussing scholarship tax credits with clients, start by identifying which tax credit they mean.

First, determine whether the client is considering a state scholarship tax credit, the federal EFTC, or both. Then confirm that the relevant state participates in the applicable initiative and that the organization receiving the contribution holds the required status for that specific tax credit.

Advisors should also review applicable credit limitations, federal and state coordination rules, the client’s tax circumstances, and current IRS, Treasury, and state guidance.

That distinction is especially important because terms such as “SGO tax credit,” “scholarship tax credit,” “EFTC,” and “federal scholarship tax credit” may be used interchangeably in conversation even though they do not always describe the same rules.

Help Clients Understand the EFTC

For more than 25 years, ACE Scholarships has helped expand access to educational opportunity through scholarship administration. That experience gives advisors a practical resource as they prepare to help clients understand the EFTC.

For advisors, the immediate opportunity is education: understand how the federal EFTC works, distinguish it clearly from state scholarship tax credits, and help clients ask the right questions as implementation continues.

Explore Advisor Resources to learn more about the Education Freedom Tax Credit and how to discuss it with clients.