Education Tax Credit rules released by the Internal Revenue Service and the Treasury Department would establish the framework for a new federal credit beginning January 1, 2027.
The proposed regulations cover the Federal Scholarship Tax Credit created under Section 25F of the Internal Revenue Code and commonly called the Education Freedom Tax Credit.
Under the proposal, eligible individual taxpayers could claim a nonrefundable federal income tax credit of up to $1,700 for qualifying cash contributions to approved Scholarship Granting Organizations.
Married couples filing jointly could claim a combined credit of up to $3,400.
The rules are not a current tax benefit for 2026 returns, and the program will depend on participating states and eligible scholarship organizations completing required steps before contributions qualify.
Table of Contents
What the new Education Tax Credit would do
The Education Tax Credit is designed to encourage private contributions to organizations that provide scholarships for eligible elementary and secondary school students.
The scholarships could help pay for a broad range of qualified K-12 education costs, including private-school tuition, tutoring, special-needs services, books, supplies, computers and other approved equipment.
The Education Tax Credit would apply to qualifying cash donations rather than directly reimbursing a family for tuition or other school expenses.
Taxpayers would generally make contributions to an eligible Scholarship Granting Organization, or SGO, that appears on the applicable state list.
The credit would be nonrefundable, meaning it could reduce federal income tax owed but generally would not create a refund when the credit exceeds a taxpayer’s federal tax liability.
Proposed rules would allow unused Section 25F credit amounts to be carried forward for up to five years.
When the credit would become available
The Education Tax Credit is scheduled to apply to qualifying contributions made beginning January 1, 2027.
Section 25F was enacted in 2025 and applies to taxable years ending after December 31, 2026.
That timing means taxpayers should not treat the proposed Education Tax Credit as an option for contributions made during 2026 unless final guidance or the statute provides otherwise.
The IRS and Treasury said taxpayers, states and SGOs may rely on the proposed regulations for qualifying contributions beginning January 1, 2027.
Because the regulations are proposed, some provisions could change after public review and final agency action.
State participation is required
The federal program is voluntary for states and the District of Columbia.
A state must elect to participate and provide the IRS with a list of eligible SGOs before taxpayers can claim the credit for contributions to organizations in that state.
The IRS maintains a Federal Scholarship Tax Credit page with information about states that have made advance elections for 2027.
The agency’s current list includes states such as Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.
State participation can change as additional jurisdictions complete the election process and submit the required information.
Taxpayers may be able to contribute to an eligible SGO in a participating state even when they live in another state.
However, taxpayers should confirm that the organization is on the official list and that the contribution satisfies the federal requirements before making a donation intended to qualify for the credit.
Who can receive scholarship funding
The proposed rules address student eligibility, household income limits and verification procedures for scholarship recipients.
The regulations would generally disregard certain noncash items, including imputed returns on home equity, when applying the household-income limitation.
The proposal also includes streamlined verification provisions for some families participating in needs-based programs, foster children and certain students receiving tutoring or special-needs services in low-income areas.
Treasury and the IRS estimate that the proposed eligibility rules and safe harbors could make approximately 96 percent of children in participating states eligible for Section 25F scholarship funds.
That estimate is an agency projection rather than a guarantee that every child in a participating state will qualify.
Specific eligibility will depend on the statute, final regulations, state administration and the requirements applied by an eligible SGO.
Rules for Scholarship Granting Organizations
An SGO generally must be a Section 501(c)(3) public charity that maintains qualified contributions separately and satisfies statutory scholarship and operational requirements.
The organization must also be included on the applicable state’s official SGO list.
The proposed regulations would create a framework for multistate SGOs and an operational safe harbor for qualifying organizations whose activities are at least 85 percent scholarship-granting activities.
Treasury and the IRS estimate that the safe harbor could allow about 450 additional organizations to participate and increase qualified contributions by as much as $3 billion annually.
Participating states generally would not be allowed to impose operating requirements more restrictive than those established under Section 25F.
The proposal would also limit states’ ability to use discretionary certification standards to exclude organizations that otherwise meet the federal requirements.
New reporting and fraud-prevention procedures
The proposed and temporary regulations would establish reporting, verification and audit requirements for states and SGOs.
The package includes planned IRS portals for participating states and organizations, donor identification procedures that avoid requiring SGOs to collect donors’ Social Security numbers, annual reporting and audits.
The rules would also create procedures for removing organizations that fail to satisfy applicable requirements.
These safeguards are intended to reduce duplicate benefits, improper payments and misuse of scholarship funds.
Taxpayers would generally be allowed to rely on an organization’s inclusion on the IRS SGO list when making a contribution.
That reliance rule could make it easier for donors to determine whether an organization is eligible, although taxpayers should still retain donation records and acknowledgments.
How the credit may interact with other tax benefits
The proposed regulations include a taxpayer-favorable ordering rule for people who may qualify for both state tax credits and the federal Education Tax Credit.
The ordering provision is intended to help taxpayers access the maximum credit allowed under the law when state and federal incentives apply to the same contribution.
The Section 25F credit is separate from existing higher-education credits such as the American Opportunity Tax Credit and the Lifetime Learning Credit.
Existing higher-education credits generally relate to qualified postsecondary expenses, while the new program is aimed at contributions supporting scholarships for elementary and secondary education.
Taxpayers should not assume that a contribution qualifies merely because it is connected to education or because another education-related tax benefit is available.
The type of contribution, recipient organization, state participation, taxpayer filing status and federal tax liability can all affect the result.
What taxpayers should do before 2027
Taxpayers who may want to use the Education Tax Credit should first watch for final regulations and updated IRS instructions.
They should also check whether their state has elected to participate and whether the intended SGO appears on the official federal or state list.
Donors should keep receipts, acknowledgment letters and other records showing the date, amount and recipient of each qualifying contribution.
Because the credit is nonrefundable, taxpayers may also need to consider whether they expect to owe enough federal income tax to use the full credit.
Married taxpayers should review filing-status rules because the proposed maximum of $3,400 applies to married couples filing jointly.
Families seeking scholarships should contact participating SGOs for details about student eligibility, application procedures, award timing and expenses that the organization will cover.
The IRS and Treasury have not announced that every state will participate, and the proposed rules do not guarantee that every eligible student will receive a scholarship.
Program outlook
Treasury and the IRS estimate that the program could eventually involve 600 to 700 SGOs and support as many as 2.2 million scholarships annually by 2030.
The agencies also estimate that more than 11 million taxpayers could make nearly $26 billion in qualified contributions each year under the projected program.
Those figures are estimates of potential participation and should not be read as guaranteed enrollment, donations or scholarship awards.
The immediate development for taxpayers is the release of proposed implementation rules ahead of the January 2027 launch.
Until the rules are finalized and state and SGO systems are established, taxpayers should treat the Education Tax Credit as a future benefit rather than an available credit for current tax filings.
Frequently Asked Questions
When does the new Education Tax Credit begin?
The federal Education Tax Credit is scheduled to apply to qualifying cash contributions made beginning January 1, 2027, subject to the final rules and state participation requirements.
How much is the federal Education Tax Credit worth?
The proposed rules allow a maximum annual credit of $1,700 for an eligible individual and up to $3,400 for married taxpayers filing jointly.
Is the Education Tax Credit refundable?
No. The proposed Section 25F credit is nonrefundable, so it generally can reduce federal income tax owed but cannot create a refund beyond a taxpayer’s liability.
Do all states participate in the program?
No. Participation is voluntary. A state or the District of Columbia must elect to participate and submit an eligible Scholarship Granting Organization list to the IRS.
What expenses can the scholarships cover?
Eligible scholarships may support qualified K-12 expenses such as private-school tuition, tutoring, special-needs services, books, supplies, computers and other approved education costs.
Fact-Checked: Key program amounts, timing, proposed-rule status and state-participation requirements were checked against current IRS and Treasury materials published or updated in 2026. ([irs.gov](https://www.irs.gov/newsroom/the-trump-administration-advances-the-establishment-of-americas-first-nationwide-school-choice-program?utm_source=openai))
Disclaimer: This article summarizes proposed federal tax rules and is not individualized tax advice. Final regulations or state guidance may change eligibility and filing requirements.
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