WASHINGTON, D.C. — The Treasury Department and Internal Revenue Service have proposed rules for a new federal tax credit that could channel billions of dollars annually into K-12 scholarships beginning in 2027, while leaving states to decide whether scholarship organizations within their borders can participate.
The Education Freedom Tax Credit allows individual taxpayers to claim a nonrefundable federal income tax credit of up to $1,700 annually for qualifying cash contributions to eligible Scholarship Granting Organizations, or SGOs. Married couples filing jointly could claim up to $3,400 based on each spouse’s qualifying contributions.
The credit, created under Section 25F of the Internal Revenue Code in 2025, applies to qualifying contributions beginning Jan. 1, 2027. Unlike a tax deduction, the credit reduces federal income tax dollar-for-dollar, although it cannot generate a refund beyond a taxpayer’s liability.
Unused credits could be carried forward for as long as five years.
Treasury and the IRS estimate that by 2030, more than 11 million taxpayers could contribute nearly $26 billion annually to 600 to 700 SGOs. That level of funding could support about 2 million full-time scholarships of $12,000 each or 5 million part-time scholarships of $4,500 each, depending on participation, donations and decisions by scholarship organizations.
States must voluntarily participate for SGOs operating within them to qualify. Participating states would identify eligible organizations, while taxpayers could contribute to an approved SGO in any participating state regardless of where the donor lives.
Thirty states have already opted into the program, according to Treasury Secretary Scott Bessent.
“Thirty states have already opted in, and we encourage all 50 states to participate so every American student and family can benefit,” Bessent said.
For 2027, participating states must submit an advance election to the IRS by Jan. 1 and their lists of qualifying SGOs by Feb. 15. In subsequent years, SGO lists generally would be due by Jan. 1.
An SGO generally must be a Section 501(c)(3) public charity and satisfy federal scholarship and operational requirements. Organizations must spend at least 90% of qualifying funds on scholarships, maintain qualified contributions in separate accounts and provide scholarships to at least 10 students who do not all attend the same school.
Student eligibility generally would be limited to children eligible to enroll in a public elementary or secondary school whose household income in the prior year does not exceed 300% of the area’s median gross income, adjusted for family size.
Treasury and the IRS estimate that about 96% of children in participating states could qualify under the proposed regulations and their safe harbors. Eligibility would not guarantee a scholarship because awards would depend on available SGO funding and individual organizations’ decisions.
Scholarships could cover private-school tuition as well as expenses associated with public, private, religious and charter education, including tutoring, special-education services, books, supplies, computers, equipment and qualifying extended-day programs.
Families receiving scholarships would not need to owe federal income tax to benefit, and qualifying scholarship payments would be excluded from their federal taxable income. The $1,700 donor credit also would not cap the amount an SGO could award to an individual student.
The proposed rules would limit states’ ability to impose additional restrictions on participating SGOs. States generally could not use certification standards to exclude otherwise qualifying organizations or impose requirements more restrictive than Section 25F based on the type of school a recipient attends or the qualified expenses a scholarship supports.
Treasury is also proposing a framework for multistate SGOs and an operational safe harbor for qualifying organizations whose activities are at least 85% scholarship-granting activities. The agencies estimate that provision could allow roughly 450 additional organizations to participate and increase qualifying contributions by as much as $3 billion annually.
Donors would have to identify a contribution as intended for the federal credit and retain an acknowledgment from the SGO containing a unique donor number. Contributions could not be earmarked for a particular student.
State tax credits claimed for the same contribution would reduce the amount eligible for the federal credit before application of the $1,700 individual limit. Taxpayers also could not claim a federal charitable deduction for the portion of a contribution used to obtain the credit.
Temporary regulations issued alongside the proposal establish procedures states and SGOs can use to prepare for the 2027 launch, including state elections, SGO certification, electronic registration, donor acknowledgments and contribution reporting.
The regulatory framework also includes annual SGO reporting, audits and procedures for removing organizations that fail to meet program requirements. Unique donor numbers are intended to allow verification without requiring scholarship organizations to collect donors’ Social Security numbers.
Taxpayers, states and SGOs may rely on the proposed regulations for qualifying contributions beginning Jan. 1, 2027, before final regulations are issued, provided they consistently follow the provisions applicable to them.
For information about participating states, visit the Federal Scholarship Tax Credit page on IRS.gov.
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