A school exploring an SGO asked us this week whether §25F donations are locked to the donor's state. They are not: the statute puts no residency test on donors, so any US taxpayer can give to a listed SGO and claim up to $1,700. The state line binds the other side of the ledger, because an SGO must spend qualified contributions on students solely within the state where it is listed. That asymmetry changes donor strategy, multi-state plans, and the math for holdout states.
The question came to us this week from a school weighing whether to form a Scholarship Granting Organization: the school is in one state, a sister school sits in another, the affiliated boys’ school is across a river in a state that has not opted in, and the alumni who would fund the whole thing are scattered across the country. Does the money have to come from in-state? Can it go out of state? It is a fair thing to be confused about, because every state-level tax-credit scholarship program that exists today is built around a state tax return, so geography is baked into the donor side. The Education Freedom Tax Credit (also called the Federal Scholarship Tax Credit, ECCA, or §25F) is built the other way around, and the statute settles both halves of the question in two short passages.
Start with the donors, because this is the half people get wrong in the cautious direction. §25F(a) allows the credit to “an individual who is a citizen or resident of the United States,” and that is the entire residency requirement. There is no condition that the donor live in the SGO’s state, and no condition that the donor’s own state have opted in. A graduate living in Oregon, which has affirmatively declined to participate, can give to a Virginia-listed SGO and claim the full credit on her federal return, because the election that matters is the one made by the state that listed the organization, not the one where the donor sleeps. The credit is capped at $1,700 per taxpayer (the statutory reading we walk through in why the credit is $1,700, not $3,400), and §25F(b)(2) trims it by any state-level credit claimed for the same contribution, but neither limit has anything to do with where the donor lives.
Now the other half, which people get wrong in the optimistic direction. §25F(c)(3) defines a qualified contribution as one the organization “uses to fund scholarships for eligible students solely within the State in which the organization is listed” under subsection (g). That single word “solely” is the geography of the whole program. An SGO listed by Virginia can accept a Texan’s dollar and an Oregonian’s dollar, but every one of those dollars can only become a scholarship for a Virginia student. There is no mechanism for a listed SGO to “send money” to students in another state, however worthy, because a contribution spent on out-of-state students stops being a qualified contribution at all, which puts the donor’s credit and the organization’s listing both at risk. Donations travel; scholarships do not.
Put the two halves together and you get an asymmetry with real consequences for states still on the fence. A state that has not elected in has no list, so no SGO anywhere can award §25F scholarships to its students. But its residents remain federal taxpayers with a $1,700 credit available to them, and nothing stops them from giving to a listed SGO next door. Money flows out of a holdout state and never in, the dynamic we described when fact-checking the union campaign against the credit: a state that sits out does not protect its kids, it exports their help. For a school network straddling a participating state and a holdout state, that cuts both ways: families at the holdout-state school cannot receive scholarships until their state elects in (where each state stands is on the participation map), but those same families can donate today to fund students at the participating-state school.
What the statute does not settle is the multi-state organization. §25F(c)(3) speaks of “the State in which the organization is listed,” in the singular, and nothing in the section says whether one entity can appear on two states’ lists, or how its books must be kept if it does. The anti-comingling rule at §25F(c)(5)(B) already requires separate accounts for qualified contributions, and it is hard to see how a dual-listed organization satisfies the “solely within the State” test without running what amounts to a separate per-state pool, but that is inference, not rule. The organizational requirements in subsection (d), including scholarships for ten or more students who do not all attend the same school, are written at the level of the organization, yet every award still has to flow through some state’s listing, so a sibling campus in a non-participating state cannot host recipients no matter how the entity is structured. This is squarely the kind of mechanic Treasury’s forthcoming regulations need to address, and until they do (no state has opened SGO certification yet), the prudent plan for a two-state school network is one listing per state and no promises of cross-state awards.
For anyone building an SGO now, the practical read is that the donor map is the country and the scholarship map is your state, and most fundraising plans we see are sized to the wrong one. Alumni networks, out-of-state grandparents, and supporters in neighboring holdout states are all fully in play from day one, which for schools with a national footprint may be the single most underused asset in the program. Note that soliciting donations across state lines carries its own ordinary state-law obligations, like charitable solicitation registration, which §25F neither creates nor waives. If you are organizing now, the free SGO builder walks through formation step by step, the participation map tracks which scholarship maps exist yet, and the SGO directory shows who is already organizing in each state.
