You Don't Have to Live in a Participating State to Claim the $1,700 Scholarship Tax Credit

The most common question we hear from donors in states that have not opted into the Section 25F program is some version of: "So I just can't participate?" It is a reasonable assumption — and it is wrong. Nothing in the statute requires a donor to live in a participating state. Understanding exactly what the law requires, and what it does not, opens a real giving path for donors in holdout states starting January 1, 2027.

What the Statute Actually Requires

The Section 25F credit — the IRS's official name is the Federal Scholarship Tax Credit; press coverage often calls it the Education Freedom Tax Credit — is available to individual U.S. citizens and residents who make cash contributions to a qualifying Scholarship Granting Organization. Two geographic conditions matter, and neither is about the donor:

• The SGO must be listed. The organization must appear on the certified list of a state that has elected to participate for that year.
• The student must reside in that state. A qualified contribution funds scholarships solely for eligible students within the state in which the SGO is listed.

The donor's own state of residence appears nowhere in that chain. A taxpayer in Michigan, Wisconsin, or California — none of which are participating for 2027 — can contribute to an SGO listed in Iowa, Ohio, or any of the 30 participating states, designate that state, and claim the full federal credit of up to $1,700 ($3,400 for a married couple filing jointly, as two individuals).

How It Works Mechanically

Multistate SGOs are required to have donors designate the state in which their contribution will be used, and to track and match designated contributions to scholarships for students residing in that state. So the cross-state gift is not a loophole — it is the designed shape of the program. The donor picks a participating state at the moment of giving; the dollar enters that state's segregated account; it funds a student who lives there. We cover the full structure in our multistate SGO explainer.

Three practical notes for donors:

• Cash only. Qualified contributions must be cash — no appreciated stock, and donor-advised fund distributions do not work, because the credit runs to the individual taxpayer.
• No double benefit. A contribution credited under Section 25F cannot also be taken as a charitable deduction.
• Unused credit carries forward. The credit is non-refundable, but unused amounts carry forward up to five years.

An Underappreciated Advantage for Holdout-State Donors

Here is a detail that cuts in favor of donors in non-participating states: the federal credit is reduced by any state tax credit claimed for the same contribution. A donor in a state with its own tax-credit scholarship program has to net the two benefits. A donor in a holdout state has no overlapping state credit — so the federal credit arrives at full value, undiluted.

The Honest Trade-Off

There is no way around this part, so it should be said plainly: a Michigan donor's gift to an Iowa-listed SGO funds Iowa students. Michigan children cannot receive Section 25F scholarships until Michigan opts in. Michigan legislators debating the issue have made exactly this point — credits claimed by residents of non-participating states will fund students elsewhere.

For some donors that is fine; helping an income-eligible family afford school is the point, wherever that family lives. For donors whose motivation is their own community, cross-state giving is best understood as a bridge: real scholarships funded now, a giving habit and infrastructure in place, and a donor base already organized on the day their home state opts in. States may elect annually, so a state that is out for 2027 can be in for 2028 — Michigan's decision point, for example, follows its November 2026 gubernatorial election.

The Organized Version: State-Conditional Pledges

For SGOs and school communities in holdout states, the sharpest tool available right now is the state-conditional pledge: a donor commits today, and the gift processes only if and when the state opts in. Nothing is contributed — and nothing is at risk — unless the condition is met.

This converts a state's worst feature (uncertainty) into pipeline. It gives organizers a concrete number to show a board ("this is what launches the day we're in"), it gives would-be donors a way to act now without writing a check into limbo, and it pairs naturally with cross-state giving for donors who want to fund students immediately in a neighboring participating state. Our ClearPath Pledge platform was built for exactly this pattern, including the state-condition trigger.

What to Do If Your State Is Out

• Give across the line if immediate impact is the goal. Pick a participating state — ideally one where you have a genuine connection — designate it, and claim the credit. Confirm the SGO appears on that state's certified list for the year.
• Make a conditional commitment if your community is the goal. A state-conditional pledge costs nothing unless your state opts in, and organized pledge totals are among the more persuasive facts a future governor or legislature can be shown.
• Watch the annual election cycle. Participation is elected year by year. The state tracker follows every state's status, sourced against the IRS participating-state list.

The Section 25F program was designed with mobile money and fixed students. Donors who understand that asymmetry can participate from anywhere in the country on day one — and can be the reason their own state's students participate in year two.