The Federal Scholarship Tax Credit (FSTC) and Catholic Schools: Eight Questions That Need Answering Before January

A new federal tax credit takes effect January 1, 2027. Some of these decisions sit at the diocesan level and some sit at your school. Here is how to tell which is which.

Because it gives your community a new way to support students. Starting January 1, 2027, an individual taxpayer can direct up to $1,700 of their federal income tax to a scholarship granting organization (SGO) and receive a dollar-for-dollar credit, or up to $3,400 for a married couple filing jointly if each spouse gives. The SGO uses those gifts to fund scholarships for eligible students, which can include families at your school. The donor is not giving away money they were planning to keep. They are redirecting money that was already leaving their hands.

That is a much easier “parish hall” conversation to have than a full blown capital appeal.

Treasury announced on October 1 that 30 states had opted in, and more may join. Check the current IRS list rather than relying on anything published earlier. You will see the program called the Federal Scholarship Tax Credit there. Same program, also known as the Education Freedom Tax Credit.

Watch for the second step. A state has to not only elect to participate in the FSTC, but also submit its list of approved scholarship granting organizations (SGOs) to the IRS. A state that has opted in to the program but not submitted their SGO list is not ready.

This is the first question we get in Catholic school conversations, and it deserves a direct answer. No. The credit operates through the federal tax code. The dollars are private contributions from individual taxpayers, not a federal education appropriation, and the structure does not create federal authority over admissions, curriculum, hiring, or religious identity.

Your state sets its own certification requirements for SGOs, though, and those vary.

A student qualifies if their household income is at or below 300% of the area median gross income where they live and they are eligible to enroll in a public elementary or secondary school. The SGO, not the school, verifies eligibility, and families in certain need-based programs may qualify through streamlined verification.

Treasury estimates that about 96% of children in participating states would be eligible under the proposed rules, so the group may be much broader than you expect. Check the median for your own service area before assuming which of your families fall in or out.

A tax credit does not fundraise itself. Someone has to find donors, explain the mechanism, and walk them through it at tax time.

Most schools and dioceses do not have that capacity. Some will use their existing advancement staff. Others will bring in outside help, which is why FACTS partnered this year with RedefinED School Advancement, an organization that has raised more than $85 million in scholarships for schools across the country. Whichever route you take, make sure to have in place before January.

Not automatically. An existing fund has to meet federal requirements and be certified by a participating state. Some diocesan foundations are close to having these requirements. Others need real changes to governance, accounting, and award procedures.

If you are a single school rather than part of a system, this question is usually simpler. You will most likely partner with an existing SGO rather than form one. Ask your diocese first whether they are already partnering with or standing up their own SGO.

If your state already runs a tax credit program, the FSTC can work alongside it, but the federal credit is reduced by any state credit on the same gift. The federal credit also can’t be combined with a federal charitable deduction on the same dollars. Donors should confirm the details with a tax professional.

For diocesan leaders: confirm your state’s status, decide on the SGO path, and make sure you have someone on staff that owns it.

For school leaders: make sure your enrollment and financial aid records are in order. FSTC eligibility verification and award coordination rely on that data, so those records are imperative regardless of what your diocese decides.

Final Treasury regulations. The IRS released proposed rules on October 1. States, SGOs, and taxpayers may rely on them for contributions beginning January 1, 2027. However, comments on these rules are due December 1, and a public hearing is scheduled for December 15. Treasury has also not landed on a final word about which education expenses qualify.

FACTS is not an SGO. However, FACTS Compass is the operational platform SGOs can use for donor contributions, application intake, eligibility verification, award management, and the reporting that keeps a program audit-ready. As you evaluate an SGO partner, ask how it will handle each of those from day one.

The schools and dioceses that are set up for success are the ones that have enrollment and financial aid records in good order when that first donation comes in. FACTS has the tools to help.

What we know so far, including a readiness playbook and recorded sessions with our school choice team, is on our EFTC resource page.

Provided by FACTS Management, an NCEA Corporate Partner, for general information only. Not tax or legal advice. Consult your own advisors before acting.