North Carolina has enrolled in a new federal school choice tax credit program after the General Assembly overrode Gov. Josh Stein’s veto of House Bill 87.
The Senate voted 30–19 along party lines to override the veto, reaching the required three-fifths majority. The House voted to override in May.
The new law enables North Carolinians to claim a federal tax credit of up to $1,700 annually for donations to 501(c)(3) nonprofits that qualify as “scholarship granting organizations” (SGOs).
The provision stems from recent federal legislation (Pub. L. No. 119-21, § 70411) and required states to opt in, which prompted passage of HB 87. The credit will apply to qualifying contributions beginning in 2027.
To qualify, SGOs must meet federal requirements, including:
– Operating as a 501(c)(3) public charity
– Awarding at least 10 scholarships to students attending more than one school
– Spending at least 90% of revenue on scholarships
– Maintaining safeguards around income verification and fund segregation
– Being approved and listed annually by the state
North Carolina has designated the State Education Assistance Authority to vet and certify SGOs and submit the list to the U.S. Treasury. Nonprofits will need state approval to receive credit-eligible contributions.
The credit differs from a standard charitable deduction by providing a dollar-for-dollar reduction in federal tax liability, creating a significantly stronger incentive for giving. Unlike North Carolina’s existing Opportunity Scholarship program, SGO funds can be used for a broader range of K-12 education expenses, including tutoring, technology, and transportation. Federal law also includes safeguards to prevent donors from directing scholarships to their own children or otherwise engaging in self-dealing.
Tax professionals should be aware that the law creates a new federal credit tied to charitable contributions, effective in 2027. However, implementation details are still pending, such as if/how scholarships for public school students will be used.
The IRS and Treasury are expected to propose regulations on the Education Tax Freedom Credit by end of September. That guidance is intended to establish a clear framework for implementation, compliance, and reporting prior to the credit’s launch in 2027.
If you have questions about this topic or other policy matters, please contact NCACPA Coordinator of Advocacy & Outreach Will Edmondson.