The $1,700 Tax Credit for Donors No One’s Talking About 

Nonprofits have been working hard to determine exactly how recent changes to the tax law may affect giving in the coming year. But among the law’s biggest changes is one that few have considered yet: a tax credit for donors to a very narrow cause. 

Set to start in 2027, the law provides a tax credit of up to $1,700 to donors to educational scholarships to K-12 students in states that choose to participate.

“This is the first time in federal taxes that a tax credit has been given for charitable contributions. And it doesn’t matter what bracket you’re in,” says Mark Ottoni-Wilhelm, a professor at the Indiana University Lilly Family School of Philanthropy. “It could be the case that 20 years from now, we’re talking about this.” 

Unlike tax deductions, which subtract the amount donated from the income being taxed, tax credits are subtracted from the amount the taxpayer owes. If a taxpayer owed $3,000 in taxes to the federal government and they gave $1,700 to a K-12 scholarship, they would only owe the government $1,300 in taxes. This creates a large and direct saving for donors, says Mike Wang, a partner who works with donors at the philanthropic advisory firm Building Impact Partners. “There’s just a lot more bang for the buck,” he says.

While the tax credit offers obvious advantages to donors, there are still unanswered questions about how the law will be implemented, and whether it will shift charitable giving from other sectors into education as some donors chase the lucrative tax credit.

Law’s Implementation Will Take Time

The tax credit provision doesn’t go into effect until 2027. There are two likely reasons lawmakers chose to do that, says Brian Flahaven, a vice president at the Council for Advancement and Support of Education who follows policy issues for the group. First, he says, starting the provision a year later reduces the cost. Second, the later start date gives the Treasury Department, which oversees the Internal Revenue Service, a chance to create the rules that explain how the law will work in practice.

The law will not automatically apply to everyone. States must opt in to the program in order for their residents to be eligible for the credit. IRS rulemaking will clarify how the opt-in works. It’s not clear how many states will actually participate.

“The reality of the politics around private education and public education is always a very divisive issue,” Flahaven says. “You will not get all 50 states to say yes to this provision.”

Though the tax bill itself was highly partisan — no Democrats voted for it — it’s not clear how politics will play into state participation in the program, Flahaven says. “If you’re not saying yes to it, what are you leaving on the table potentially in terms of additional resources for schools in your state?” Flahaven says. “I don’t know that you can necessarily say it’s going to be all red states will say ‘yes,’ all blue states say ‘no.’”

The government also needs to clarify how the $1,700 rule will be applied. The National Association of Independent Schools, CASE, and others have suggested that the tax credit be doubled to $3,400 for married couples, which  could further expand its impact.

In addition, donations will not count if they go directly to schools themselves. They must be given to scholarship-granting organizations that will then distribute the funds to qualifying schools. Participating states will need to designate which of these regranting organizations will qualify for the tax credit.  According to the law, these organizations must give to multiple schools and dole out 90 percent of their funding for scholarships. 

This could create some complications for states that already have their own similar systems in place. For example, Ohio has a state tax credit for donations to these regranting groups for private education. Sixty meet state requirements, says Dan Dodd, executive director of the Ohio Association of Independent Schools, but many  give only to a single school and would therefore not qualify under the federal law.

The questions surrounding the particulars of the law’s rollout won’t be answered until final rules come out. Flahaven notes the rulemaking seems to be on a fast track — the comment period closed in December. Draft rules are expected in the next four to six months, says Justin Perillo, general counsel for the National Association of Independent Schools. 

Could the Law Dampen Donations to Other Causes?

This law is a first on a few fronts. Not only is this the first federal tax credit for charitable giving, but it is also the first time that the federal government has singled out a category of charitable giving for a benefit, says the Lilly Family School’s Ottoni-Wilhelm.

Flahaven is excited about the tax credit. He says that about a third of CASE’s members are K-12 schools. But he recognizes concerns about singling out a particular cause, especially for such a lucrative benefit.

“Putting my charitable giving coalition hat on, I’m always a little wary of any provisions in the code that incentivize giving to particular types of charities over others,” he says. “You could see where that potentially could go in terms of creating winners and losers amongst the sector.”

Wang, the philanthropic adviser, thinks financial service providers will talk up the credit to donors.

“You’re going to see a lot of accountants direct people towards utilizing that tool, especially for those donors who like to give to education causes,” he says. For a donor who gives modest amounts, you can multiply two, three, four times the power of tax efficiency.

It is not an unfounded fear. Tax policy does influence giving. Ottoni-Wilhelm conducted research showing that changes in code created by the Tax Cut and Jobs Act caused a loss of $20 billion in gifts. Though such policies can shift behavior, on its own, tax law doesn’t motivate people to give, Ottoni-Wilhelm says.

“When we’re talking about the tax policy, we’re talking about the price of something people want to do for other reasons,” he says. “There are deeper, more meaningful motivations behind why people give to nonprofit organizations.”

Ohio: A Look at the Future 

Ohio, with its own similar state tax credit system, could provide a preview of how this change could affect donor behavior. 

When the state’s law went into effect, schools there were nervous about its impact,  Dodd says. The Ohio Association of Independent Schools created a separate nonprofit to serve as a scholarship-granting organization, and Dodd regularly speaks to fundraisers from member schools about the impact of the change on donor patterns. Because the incentive was so high for donations for scholarships through the regranting organizations, member schools thought donors would give less. “Were they going to get into a scenario where somebody may have given $1,000 to an annual fund, and they decided to give $1,000 to the SGO instead?” says Dodd. But that wasn’t the case. “What we found is that it’s complementary.”

He says most donors give to the scholarship granting organization on top of what they give to individual organizations. “Over all, we think that it’s helped,” Dodd says.  “And it has increased the number of options that donors have to contribute. We think that the federal credit is going to provide even more opportunities.”