Treasury Sets Out Rules for New $1,700 Federal Scholarship Tax Credit Starting in 2027

Oct 30

4 min read

The Treasury Department and the IRS on Oct. 1, 2026, issued proposed regulations (REG-117199-25) and companion temporary regulations (T.D. 10057) for the Federal Scholarship Tax Credit, a new federal income tax credit for cash donations to nonprofit organizations that fund K-12 scholarships. The credit, created by the 2025 budget reconciliation law as Internal Revenue Code section 25F and also called the Education Freedom Tax Credit, applies to qualified contributions made beginning Jan. 1, 2027. Both sets of rules were published in the Federal Register on Oct. 2. Education Secretary Linda McMahon described the program as "the largest expansion of school choice in history."

How the credit works

Amount. An individual may claim a nonrefundable credit of up to $1,700 for qualified cash contributions to an eligible scholarship granting organization (SGO). Treasury reads the cap as applying to each spouse, so a married couple filing jointly may claim up to $3,400 if each spouse contributes at least $1,700.
Carryforward. Credit that cannot be used because it exceeds the year's tax liability may be carried forward for up to five years.
Individuals only. Corporations, partnerships and other entities cannot claim the credit, and according to an analysis by the law firm Brownstein Hyatt Farber Schreck, contributions made through a partnership or S corporation do not qualify even if allocated to an owner.
No double benefit. A contribution used for the credit cannot also be deducted as a charitable gift, although an amount above the credit may still be deductible, the same analysis notes.
Residence doesn't matter. Taxpayers may give to an SGO in a participating state regardless of where they live, and they may generally rely on an organization's inclusion on an IRS list of eligible SGOs at the time of the gift.
Interaction with state credits. The federal credit is reduced by any state tax credit for the same contribution, but the proposed ordering rules are designed to preserve the full federal amount where possible. In Treasury's example, a donor who gives $2,500 and receives a $500 state credit still qualifies for the full $1,700 federal credit, because the cap applies after the state reduction.
Tax-free to families. Scholarships from SGOs are excluded from the recipient's income under new section 139K.

What scholarship organizations must do

An SGO generally must be a section 501(c)(3) public charity, keep qualified contributions separate, and appear on its state's list of approved organizations.
It must spend at least 90% of its income on scholarships for eligible students by the end of the year after the income is received, and it must award scholarships to at least 10 students who do not all attend the same school.
Eligible students must come from households with income no greater than 300% of area median gross income. Treasury estimates about 96% of children in participating states would qualify under the proposed rules and safe harbors.
Scholarships may pay for private school tuition, tutoring, special-needs services, books, supplies, computers and other qualifying K-12 expenses.
SGOs must give each donor a written acknowledgment by Jan. 31 of the following year, showing the SGO's employer identification number, total qualified contributions, a unique donor number (used in place of a Social Security number) and a statement about any goods or services provided. They must report donor information to the IRS by Feb. 28 through an IRS portal.

The states' role

The credit is available only for gifts to SGOs in states that opt in. Treasury Secretary Scott Bessent said 30 states had done so as of Oct. 1. Under the temporary regulations, a state that wants to participate in 2027 must file an advance election on Form 15714 on or before Jan. 1, 2027, and then submit its list of qualifying SGOs by Feb. 15, 2027. For later years, the advance election window runs from Jan. 2 to Sept. 30 of the preceding year. Under the proposed rules, participating states could not impose requirements on SGOs stricter than the federal statute, including limits based on school type or allowable expenses.

Treasury projects that by 2030 the program will involve more than 11 million taxpayers, nearly $26 billion in annual contributions and up to 2.2 million scholarships a year.

Who is affected

Individual donors, including business owners, who must give personally rather than through their companies.
Nonprofits planning to operate as SGOs, which face new segregation, spending and reporting rules.
State governments still deciding whether to participate in 2027.
Families seeking help with private school or other K-12 costs.

What to do now

Time the gift. Only contributions made on or after Jan. 1, 2027, qualify. A gift in late 2026 would not generate the credit.
Verify the organization. Before giving, confirm that the SGO appears on the IRS list of eligible organizations, and keep the written acknowledgment.
Coordinate with state benefits. Donors in states with their own scholarship credits should review how the two credits interact.
Get registered. Organizations planning to serve as SGOs should register through the IRS SGO portal and set up segregated accounts and donor-tracking systems.
Comment. Comments on the proposed rules are due Dec. 1, 2026. A public hearing is scheduled for Dec. 15, 2026.