Federal Scholarship Tax Credit: Proposed and Temporary Regulations Released

The U.S. Department of the Treasury and the IRS have issued proposed regulations for the Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit, which begins on January 1, 2027. The proposed regulations, which were announced in IR-2026-117, address eligibility, scholarship granting organization (SGO) operations, and tax considerations for donors.

Treasury and the IRS also issued temporary regulations establishing procedures for states and SGOs.

What Is the Federal Scholarship Tax Credit?

Established as part of the One Big Beautiful Bill Act and governed by Internal Revenue Code section 25F, the Federal Scholarship Tax Credit provides a nonrefundable federal income tax benefit for taxpayers who make qualifying cash contributions to eligible SGOs that provide scholarships for elementary and secondary education expenses.  

Under the proposed regulations, the nonrefundable annual tax credit is up to $1,700 per individual, with a combined credit of up to $3,400 for married couples filing jointly, as long as each spouse makes a separate and distinct qualified contribution. Any unused amounts may be carried forward for up to five years.

Contributions must be made to approved SGOs in states that have opted into the program. However, donors do not have to live in a participating state to contribute to an eligible SGO and claim the credit. Note that the credit applies to charitable donations made to SGOs, not direct tuition payments. Contributions cannot be designated for a particular student.

Scholarships may cover qualified education expenses, including tuition, fees, academic tutoring, books, computers, supplies, and special-needs services. To be eligible for a scholarship, students must be eligible to enroll in a public elementary or secondary school and have a household income of no more than 300% of area median gross income in the calendar year before the scholarship application. Moreover, these scholarships would be excluded from the gross income of the recipient-student and their family under a companion section of the Internal Revenue Code.

What the Proposed Regulations Address

The proposed regulations cover several aspects of program implementation. This includes:

• Student eligibility and verification – Rules for applying the statutory household limitation and eligibility verification rules for certain families participating in needs-based programs, foster children, and certain students receiving tutoring or special needs services in low-income areas.
• SGO operations – A framework for SGOs operating in multiple states, along with scholarship administration and recordkeeping requirements.
• Coordination with state tax credits – Rules for subtracting applicable state tax credits from qualifying contributions before applying the federal credit limit.
• Reporting and oversight – Verification, reporting, and audit requirements intended to prevent duplicate payments, improper use of scholarship funds, and other fraud or abuse.

Temporary Rules for States and SGOs

The temporary regulations establish procedures for participating states and organizations certified as SGOs. This includes state elections and SGO certifications, electronic registration through IRS portals, reporting of qualified contributions, and donor acknowledgments. The temporary regulations apply as of September 1, 2026, and expire on October 1, 2029. The regulations state that taxpayers, SGOs, and states may rely on the proposed regulations, provided that they are followed consistently. 

Considerations for Private Elementary and Secondary Schools

Private elementary and secondary schools should evaluate how SGO scholarship payments would fit into their billing and financial aid processes. Under the proposed regulations, scholarship funds covering tuition, fees, room and board, and certain other qualified expenses must be paid directly to the school. Schools would be required to return any payments exceeding a student’s costs or disbursed by the SGO in error.

Key Deadlines and Next Steps

The proposed regulations are subject to change before being finalized. Treasury and the IRS are accepting written comments through December 1, 2026, and a public hearing is scheduled for December 15, 2026. Instructions for submitting comments are available in the Federal Register notice, along with instructions and deadlines related to participating in the hearing.

For 2027 participation, states must submit an advance election using Form 15714 by January 1, 2027, and provide their SGO lists and required certifications by February 15, 2027. In subsequent years, advance elections, SGO lists, and certifications will generally be due by January 1.

More information about the credit and states that have made advance elections is available on the IRS’s Federal Scholarship Tax Credit webpage.

Preparing for 2027

Schools, state agencies, and individuals and families considering the program should review the proposed regulations and identify the requirements that are applicable to their participation. Evaluating potential tax implications and administrative needs now can help surface questions to address as implementation continues.

Contact your CRI advisor to discuss how the Federal Scholarship Tax Credit may affect you or your school and next steps to consider.