Treasury and IRS Release Proposed Rules for New Education Freedom Tax Credit

Overview

The U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations on Oct. 1, 2026, to implement section 25F, known as the Education Freedom Tax Credit.

This is the first federal tax credit for private contributions supporting K-12 scholarships. The credit becomes available for taxable years ending after Dec. 31, 2026.

Companion temporary regulations set procedures for states and scholarship granting organizations to prepare for the program launch on Jan. 1, 2027.

Taxpayers, states and SGOs may rely on the proposed regulations for contributions made beginning on that date.

Credit Details and Eligible Uses

Individual taxpayers can claim up to $1,700 annually while married couples filing jointly can claim up to $3,400 combined for cash contributions to eligible SGOs.

Contributions may go to SGOs in any participating state regardless of the taxpayer’s state of residence.

Scholarships funded through these contributions cover a range of qualified elementary and secondary education expenses, including private school tuition, academic tutoring, special-needs services, books, supplies, computers, other equipment and costs tied to student enrollment or attendance.

Student Eligibility and State Role

States voluntarily elect to participate and identify eligible SGOs. The proposed regulations address the household-income limitation by generally excluding non-cash items such as imputed return on home equity.

Streamlined verification applies for families in certain needs-based programs, foster children and students receiving tutoring or special-needs services in low-income areas.

Under the proposed rules and safe harbors, approximately 96 percent of children in participating states would meet eligibility for scholarship funds.

States may not add operating requirements for SGOs that are stricter than those in section 25F, including limits on school types or covered expenses, nor use discretionary standards to exclude qualifying organizations.

SGO Framework and Taxpayer Rules

The proposed regulations include a framework for multistate SGOs with a safe harbor for organizations where at least 85 percent of activities are scholarship-granting. This could allow about 450 more organizations to participate and add up to $3 billion in annual contributions.

A taxpayer-favorable ordering rule applies when individuals qualify for both state and federal credits. Unused credits may be carried forward for up to five years.

Taxpayers may generally rely on an organization’s listing on the IRS SGO list when making contributions.

Safeguards and Preparation

The regulations establish reporting, verification and audit requirements to prevent duplication, improper payments, fraud and abuse. These include IRS portals, unique donor numbers, annual SGO reporting, audits and procedures to remove noncompliant organizations.

Temporary regulations provide immediate guidance on state elections, SGO certification, electronic registration, donor acknowledgments and contribution reporting so systems can be ready for 2027.

The rules reflect stakeholder feedback received after a June preview on topics such as student eligibility, SGO operations, state administration, reporting and program integrity.

Readers should review the full proposed and temporary regulations and verify current details directly with the IRS.

Families who also have an existing tax debt may have questions about private tax-resolution help beyond this education-credit announcement. Republic Tax Relief describes tax-resolution services and advertises a free, no-obligation initial consultation. Readers can contact the firm to discuss their debt concerns and ask about the scope and fees for further assistance; the advertised consultation is distinct from determining eligibility for the proposed credit.