If Pennsylvania Joins, a Couple Could Send $3,400 of Their Federal Taxes to Scholarships

Starting in 2027, a married couple could give $3,400 to a private-school scholarship fund and get every dollar back as a federal tax credit, $1,700 for each spouse, if they live in a participating state. Pennsylvania hasn't made the choice to participate yet.

Pennsylvania already rewards a similar gift, but its credit was built for businesses. The federal credit is for individuals. And on one reading of the Treasury Department's draft rule, the route most Pennsylvania individuals use to reach the state credit would earn nothing federally, so the two credits probably can't be for the same donation.

The program opens January 1, 2027, and states must join by then to take part in the program in 2027. Under the federal law, the Governor makes that call unless state law hands it to someone else. The Treasury's rules for the credit are also still a draft.

Here is what happens to the money in either program. The giver sends a check to a qualifying organization, and the credit is subtracted from the donor's tax bill, not from taxable income the way a deduction is.

The donation is to a qualified organization that pools the gifts. That organization picks families under an income limit, and the tuition goes to the school. A donor can designate a school to receive his or her gift but has no say over which child benefits.

Pennsylvania offers two such credits, the Educational Improvement Tax Credit and the Opportunity Scholarship Tax Credit, and from a giver's side they work the same way. A business gives to a state-approved organization and subtracts most of the gift from its Pennsylvania taxes.

A one-year commitment returns 75 percent of the gift as a credit, and giving the same amount two years running returns 90 percent. The giver also chooses what the money pays for, because not every approved organization pays private-school tuition. Some fund academic programs inside public schools, and others fund pre-K scholarships.

Because a business claims the credit, an individual can't simply write a check and claim it. Individuals generally join a special purpose entity that pools such donations, instead. These are LLCs set up for this purpose, and act as a pass-through that gets and provides the credits to its members to use against their personal income tax. The tax credit cannot exceed the state taxes owed.

The federal credit differs in important ways. It cuts an individual's federal income tax directly and returns the whole gift as a credit, up to $1,700 per person per year. It can't exceed the federal tax a person owes, but unused credit carries forward for up to five years. Pennsylvania's credit, by contrast, generally must be used in the year of the gift. And the state's programs are capped at $680 million total, while the federal credit has no program-wide cap.

Because the federal and Pennsylvania programs target different types of donors, contributions to one may not yield a tax credit for the other. Two factors are involved. First, the state's Department of Community and Economic Development approves organizations for the state credit. For the federal credit, an organization must appear on a separate list the state publishes and register with the IRS. Pennsylvania hasn't joined the federal program yet, so it has not published the list of scholarship granting organizations that would qualify. So, a would-be donor cannot see if there are organizations that are on both lists.

The bigger mismatch is who gets the tax credit, a business/qualifying partnership or an individual. The Treasury's draft rule says a gift made through a partnership or an S corporation, two common types of pass-through business that could qualify for the Pennsylvania program, doesn't earn the federal credit. So, a Pennsylvanian who gives through a special purpose entity could get the state credit but not the federal credit.

Similarly, a person making an individual donation to a recognized scholarship granting organization would qualify for the federal tax credit, but not the state one.

However, a single-member LLC owner who owes both taxes is one case in which one gift might earn both credits, though no federal or state ruling says so, and whether Pennsylvania accepts that structure is unconfirmed.

That is one reading of the two sets of rules. Neither the Treasury nor Pennsylvania has ruled on it. The answer could change if the Treasury's final rules address it, or if Pennsylvania joins and creates a way for individuals to give directly.

The Treasury takes public comments on its proposed rules until December 1 and holds a hearing December 15. Anyone can comment through the federal rulemaking site, Regulations.gov. The final rules that follow could settle the pass-through question for Pennsylvania and every other state where individual givers use these LLCs.