Section 110190 of the House-passed H.R. 1, One Big Beautiful Bill Act (the “Act”),1 has the potential to upend the financing of public education by providing a tax credit. Specifically, individuals would be entitled to a credit representing the greater of (1) $5,000 or (2) 10% of adjusted gross income (AGI). For example, an individual with an AGI of $300,000 would have a credit of $30,000. Were the $30,000 only a deduction, not a credit, the tax savings would be dramatically less.
The contribution must be made in either cash or publicly traded securities to a scholarship granting organization (SGO). The SGO uses the funds for “qualified elementary and secondary school education.” Examples of permitted expenditures include tuition, books and educational materials. Students at private and religious secondary schools would be eligible. They need not necessarily be from the lowest income families, since families with income not exceeding 300% of the median gross income of their area also would be eligible. For example, 300% of the median gross income of metropolitan Atlanta would be approximately $246,000.
What is an SGO?
It is a tax-exempt organization under sections 501(a) and 501(c)(3) devoting substantially all of its activities toward providing scholarships to elementary and secondary school students. The SGO must not be a private foundation. The Internal Revenue Code would impose prohibitions against co-mingling of contributions and self-dealing with disqualified persons within the meaning of section 4946.
Carryforward of Unused Credit
To the extent the credit exceeds the annual limitation described above, the excess is carried forward and added to the credit allowable for the next year’s gifts. Like the carryforward for the charitable deduction, the credit carryforward expires following the fifth taxable year after the taxable year in which the credit arose.
No Double Counting of the Credit or Eligibility for Charitable Deduction
If the contribution also reduces any state income tax,2 then the credit for federal income tax is reduced dollar for dollar. Any qualified contribution eligible for the credit cannot be taken into account as a charitable contribution under section 170.
A Race of Taxpayers Against Each Other
There is a volume cap of $5 billion dollars for each of the calendar years 2026 through 2029.
Credits are treated on a first-in-first-out basis. In effect, contributors are racing against one another to complete their gift before all of the volume cap has been used. The Treasury Secretary is tasked to develop a system to track and update in real time the amount of qualified contributions made during the year.
Though this provision, if enacted as is, would not be in effect in 2025, analysis of this credit should begin now. Planners likely will receive guidance from the Internal Revenue Service about whether a specific SGO is “certified” or “approved” to receive contributions that qualify for the credit.
Endnotes
- For the statutory language of this provision, please see https://www.govtrack.us/congress/bills/119/hr1/text.
- For an overview of which states fund private school choice through vouchers and other ways, see https://www.edweek.org/policy-politics/which-states-have-private-school-choice/2024/01.
Chris Woehrle, JD, LLM, is a technical consultant for Sharpe Group and writes Sharpe Group’s Charitable Dollars & Sense blog series. He teaches charitable gift planning and principles of wealth management in the LLM taxation program at the Widger School of Law at Villanova University. You can connect with Chris by email.
