Federal Scholarship Tax Credit (Education Freedom Tax Credit) — Proposed Rules: Up to $1,700 per Individual from January 1, 2027

Credit: up to $1,700 per eligible individual for a year's contributions (carryforwards can push one year's total use above $1,700); up to $3,400 on a joint return if each spouse contributes up to $1,700. Type: nonrefundable federal income tax credit.^[1][3]

Starts: contributions made on or after January 1, 2027 (claimed on 2027 returns, generally filed in 2028). Carryforward: up to five years.^[1][4]

Participating states: 30 states had made an advance election for 2027 as of September 14, 2026.^[2]

Comment deadline: December 1, 2026. Public hearing: December 15, 2026 (10 a.m. ET); it will be cancelled if no outlines of topics are received by December 1. Docket REG-117199-25.^[3]

Terms: SGO (Scholarship Granting Organization) = a 501(c)(3) public charity, not a private foundation, that keeps qualified contributions in separate accounts and is on a participating state's list. Qualified contribution = a cash gift designated for the credit when made; under the proposed definition, "cash" excludes digital assets. Nonrefundable = it can reduce tax to zero but is not paid out as a refund.^[3]

Proposed § 1.25F-2(c)(1): the credit is the lesser of (1) qualified contributions for the year "reduced (but not to below zero) by the sum of any State credits with regard to those qualified contributions" or (2) $1,700.^[3]

Treasury and the IRS chose to subtract state credits before applying the cap. They note that capping first would limit a $2,500 contribution with a $500 state credit to $1,200; by this page's arithmetic, the proposed order gives $1,700. A state income tax deduction (rather than credit) generally would not reduce the federal credit.^[3]

The credited portion cannot also be claimed as a charitable deduction; an amount that may be carried forward counts as allowed, so it cannot be deducted either; any portion for which no credit is allowed may still be deductible if it meets section 170 rules. Contributions made through a partnership or S corporation would not count.^[3][4]

Unused credit carries forward up to five years and is used first-in, first-out, before current-year credits.^[3]

A student must be eligible to enroll in a public elementary or secondary school and belong to a household whose prior-calendar-year income is not greater than 300 percent of area median gross income, adjusted for family size. Meeting the limit does not guarantee a scholarship. The proposed rules would disregard non-cash items such as a Section 8 housing allowance or imputed return on assets.^[3]

Streamlined verification would be allowed for households in SNAP, TANF, WIC, Section 8 housing or SSI, for foster children, and for certain tutoring or special-needs scholarships at schools in low-income areas.^[3]

The phrase "solely within the State" would refer to where the student lives, not where the school is located, with exceptions for dependents of members of the Armed Forces and of individuals residing on Indian Lands.^[3]

Scholarships may cover qualified K-12 expenses such as private-school tuition, tutoring, special-needs services, books, supplies and equipment; scholarships are excluded from federal taxable income.^[1][4]

Treasury and the IRS say further guidance on qualified expenses will be issued separately under section 530.^[3]

An SGO must give scholarships to 10 or more students who do not all attend the same school, spend at least 90 percent of its income on scholarships, and not earmark contributions for a particular student.^[3]

A single-State SGO whose activities are at least 85 percent scholarship granting could opt into a safe harbor and apply the operational requirements to its section 25F segregated account rather than the whole organization. A multistate SGO would be required to keep a separate section 25F account for each covered State, meet the requirements for each account, and have at least 85 percent scholarship-granting activities.^[1][3]

States could not impose SGO requirements more restrictive than section 25F, such as limiting the type of school recipients attend or the types of qualified expenses. A state's election covers a single calendar year.^[1][3]

The IRS would publish an SGO list; organizations removed from it would be shown in strike-through text with the removal date.^[3]

Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana.^[2]

Nebraska, Nevada, New Hampshire, North Dakota, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wyoming.^[2]

A state that is not on the list does not stop its residents from claiming the credit: donors may support SGOs in any participating state. Students, however, generally must reside in a state where the SGO is listed (with the exceptions described above).^[2][4]

Treasury and the IRS estimate that by 2030 the program could support 600 to 700 SGOs, with more than 11 million taxpayers contributing nearly $26 billion a year and funding as many as 2.2 million scholarships annually.^[1]

They also estimate that about 96% of children in participating states would be eligible for section 25F scholarship funds under the proposed rules and safe harbors.^[1]