A new federal tax credit could be worth up to $1,700 for taxpayers who donate to qualifying scholarship organizations beginning in 2027, and married couples filing jointly could potentially claim twice that amount.
The Internal Revenue Service and Treasury Department have released proposed regulations explaining how the new Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit, would operate.
The credit was created under Section 25F of the Internal Revenue Code by the One, Big, Beautiful Bill Act enacted in July 2025. It applies to qualified cash contributions made to participating scholarship-granting organizations, or SGOs, which use the money to provide scholarships for eligible K-12 students.
The credit becomes available for qualifying contributions beginning in 2027, but state participation will play an important role in determining which organizations can receive eligible contributions.
The Credit Can Be Worth Up to $1,700 Per Person
Under the new law and proposed IRS regulations, an eligible individual taxpayer can claim a nonrefundable federal income tax credit of up to $1,700 annually for qualified cash contributions.
Married couples filing jointly could claim a combined credit of up to $3,400, according to the IRS.
That’s an important distinction from an ordinary charitable tax deduction. A deduction generally reduces the amount of income subject to tax, while a tax credit directly reduces eligible federal income tax liability dollar for dollar.
Because this is a nonrefundable credit, however, taxpayers generally can’t receive the unused portion as a refund simply because the credit exceeds the federal tax they otherwise owe.
Unused Credit Could Carry Forward for Five Years
The nonrefundable nature of the credit doesn’t necessarily mean an unused amount immediately disappears.
The proposed regulations include rules allowing qualifying unused Section 25F credit amounts to be carried forward for up to five succeeding tax years.
For example, someone who qualifies for a $1,700 credit but can’t use the entire amount because of their federal tax liability may potentially carry the allowable unused portion into a future year, subject to the applicable rules.
That’s especially important for retirees and other taxpayers whose taxable income—and therefore federal income tax liability—can vary substantially from year to year.
Anyone considering a contribution primarily for the tax benefit should understand their own tax situation rather than assuming a $1,700 donation automatically produces a $1,700 reduction in the amount they’ll ultimately pay or receive as a refund.
States Have to Choose Whether to Participate
The new federal program depends partly on decisions made at the state level.
States and the District of Columbia can voluntarily elect to participate and submit lists of qualifying scholarship-granting organizations to the federal government.
An eligible SGO generally must be a Section 501(c)(3) public charity, satisfy specific scholarship and operational requirements and maintain qualified contributions separately from other funds.
That means taxpayers shouldn’t simply choose a local scholarship charity, make a donation and assume the contribution qualifies for the new federal credit.
The IRS plans to provide information about participating states and qualifying organizations, making verification an important step before anyone contributes specifically to claim the credit.
You May Be Able to Donate Outside Your Own State
One potentially surprising feature is that taxpayers won’t necessarily be limited to scholarship organizations operating in the state where they live.
The IRS says taxpayers may make qualified contributions to eligible SGOs regardless of their state of residence, allowing someone to support an eligible organization certified by another participating state.
Under the proposed regulations, taxpayers generally could rely on an organization’s inclusion on the IRS’s official list of eligible SGOs when making a contribution.
That could make the program considerably broader than a state-specific school scholarship tax incentive.
Still, taxpayers will need appropriate documentation, and the companion temporary regulations establish procedures for donor acknowledgments, reporting and unique donor numbers designed to verify qualifying contributions without requiring SGOs to collect donors’ Social Security numbers.
You Can’t Necessarily Claim Two Tax Breaks on the Same Dollar
Taxpayers who itemize deductions should pay particularly close attention to the rules preventing duplicate tax benefits.
Under Section 25F, the portion of a qualified contribution used to claim the federal scholarship credit generally can’t also be claimed as a charitable contribution deduction under Section 170.
The proposed rules also address taxpayers who receive state tax credits for their scholarship contributions.
Treasury and the IRS propose calculating the federal benefit in a way designed to prevent taxpayers from receiving overlapping benefits exceeding the amount contributed while still preserving the maximum federal credit allowed under the law when possible.
For someone planning a sizable charitable contribution, comparing the new credit with the tax treatment of other donations may therefore be worth discussing with a qualified tax professional before writing the check.
Scholarships Could Pay for More Than Private-School Tuition
The money collected by participating SGOs isn’t limited exclusively to paying private-school tuition.
According to the IRS, qualifying scholarship expenses can include private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other equipment, along with other qualifying expenses connected with a student’s enrollment or attendance.
The proposed regulations also establish rules for determining which students meet the program’s eligibility requirements.
Treasury and IRS estimate that approximately 96% of children in participating states could qualify for scholarship funding under the proposed rules and associated safe harbors.
The agencies further estimate that by 2030 the program could support 600 to 700 scholarship-granting organizations and as many as 2.2 million scholarships annually.
Taxpayers Should Wait for the Official SGO List
The potential $1,700 credit creates an obvious reason for taxpayers to pay attention to organizations soliciting scholarship donations in 2027.
But a charitable organization saying it supports students doesn’t automatically mean contributions to it qualify for the new federal credit.
States must participate, organizations must satisfy applicable requirements, and eligible SGOs will be identified through the program’s certification and IRS reporting system.
That makes checking the official IRS information before donating particularly important if receiving the tax credit is part of your financial decision.
Keep the required acknowledgment and other contribution records as well, rather than assuming a bank or credit-card statement alone will establish eligibility when preparing your return.
The IRS Is Taking Comments Through Dec. 1
The regulations published Oct. 2 remain proposed, meaning Treasury and the IRS can make changes before issuing final regulations.
Written and electronic comments on REG-117199-25 are due Dec. 1, 2026, and a public hearing is scheduled for Dec. 15 at 10 a.m. Eastern Time unless no speaking outlines are submitted by the deadline.
The agencies have also issued companion temporary regulations establishing procedures that states and scholarship organizations need to prepare for the program’s Jan. 1, 2027 launch.
Taxpayers, states and SGOs may rely on the proposed regulations for qualified contributions beginning Jan. 1, according to the IRS.
For taxpayers interested in the new credit, the most important steps will be determining whether a contribution qualifies, confirming the organization appears on the appropriate IRS list and understanding how a nonrefundable credit would actually affect their individual federal tax bill.
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Amanda Blankenship is the Chief Editor for District Media. With a BA in journalism from Wingate University, she frequently writes for a handful of websites and loves to share her own personal finance story with others. When she isn’t typing away at her desk, she enjoys spending time with her daughter, son, husband, and dog. During her free time, you’re likely to find her with her nose in a book, hiking, or playing RPG video games.
