If you’ve ever donated to help a student pay for private or parochial school, a new federal tax credit starting in 2027 might be worth putting on your radar. Congress has created a tax credit — not just a deduction — for certain charitable contributions, and while there are a few moving parts, the basic idea is pretty straightforward. Let’s break it down.

What Is The Charitable Giving Credit, Exactly?

The One Big Beautiful Bill Act (signed into law July 4, 2025) created a brand new federal tax credit for cash contributions to SGOs — nonprofits that award scholarships to help students cover elementary and secondary school expenses. The credit is worth up to $1,700 per taxpayer per year. That’s per taxpayer, not per return, which means married couples can each claim up to $1,700, potentially putting $3,400 back in your pocket as a couple.

Credit vs. Deduction: Why It Matters

A deduction reduces your taxable income. A credit reduces your actual tax bill — dollar for dollar. That makes credits the nerds’ preferred option (we do the math so you don’t have to).

That said, this credit is nonrefundable, meaning it can reduce your federal tax liability to zero, but won’t generate a refund if the credit exceeds what you owe. The good news: any unused credit can be carried forward for up to five years, so you won’t lose it if your liability is low in a given year.

One important rule to know: you can’t double-dip. If you claim this credit for a donation, you cannot also deduct that same contribution as a charitable gift on your return. The IRS is onto that move.

Your State Has to Opt In First

Here’s where it gets a little nerdy. For the credit to apply, your state must first elect to participate in the program and submit a list of qualifying SGOs to the IRS. Only donations to state-approved SGOs will count.

The good news for donors: even if your home state doesn’t participate, you can still contribute to an SGO in another state and claim the federal credit. The catch is that students can only receive scholarships from SGOs recognized in their own state, so families in non-participating states won’t benefit on the scholarship side.

We’ll be keeping a close eye on Michigan’s participation status and will keep you posted as that develops.

Remember: State Credits Offset the Federal One

If your state already offers a tax credit for SGO contributions (22 programs exist across 18 states as of 2025), the federal credit gets reduced by whatever state credit you receive for the same donation. The goal is to prevent taxpayers from coming out ahead of their contribution — the credit is designed to eliminate the cost of donating, not create a profit.

Who Do the Scholarships Actually Help?

This is where it gets interesting. Scholarships are limited to students whose household income is at or below 300% of the area median gross income (AMGI) — not the federal poverty level, which is the more common benchmark in state programs.

Because AMGI varies by location, so does the eligibility ceiling. In a lower-income area where the median is $60,000, families earning up to $180,000 could qualify. In a higher-cost area with a $100,000 median, that ceiling jumps to $300,000. In short, this program reaches further up the income ladder than you might expect — especially in higher cost-of-living markets.

Also worth noting: scholarship funds can be used at public, private, or religious schools — not just private schools as many assume. Qualified expenses are broad and include tuition, fees, books, supplies, tutoring, transportation, uniforms, and even computer equipment and internet access.

And for the families receiving scholarships? The money is completely tax-free under a new gross income exclusion created alongside the credit.

What Should You Do Right Now?

Honestly? Not a lot — yet. The credit doesn’t apply to any contributions made before January 1, 2027, and the IRS is still working out implementation details. Here’s how to use the time wisely:

  • Watch for Michigan news: State participation is the key variable that determines whether this credit is even available to you.
  • Review your tax liability: Since the credit is nonrefundable, it’s most valuable to taxpayers with a federal tax bill to offset. Your CPA can help you model whether this makes sense for your situation.
  • Start thinking about SGOs: If Michigan opts in, you’ll want to know which organizations qualify before writing any checks.

As always, the nerds at Lotito & Lazzara are here to help you navigate changes like this one. If you have questions about how this might factor into your tax planning, reach out to our team — we love this stuff (seriously, we’re nerds).