Tax Insight

Treasury and IRS release guidance on new federal scholarship tax credit

Insight
5 minute read
October 20, 2026

What happened?

Treasury and IRS, with input from the Department of Education, jointly released guidance ahead of the January 1, 2027, program start date for the new Education Freedom Tax Credit under Section 25F (also known as the Federal Scholarship Tax Credit). The guidance—comprising proposed regulations, temporary regulations, and FAQs—establishes an operational framework that addresses how states may elect to participate, how organizations may qualify as Scholarship Granting Organizations (SGOs), and how individual donors may claim the credit.

Why is it relevant?

This is the first federal tax credit of its kind, providing a direct incentive for individual donors to fund K–12 scholarships through qualifying SGOs. With the program taking effect in the new year, the guidance could help states, SGOs, and donors prepare. It also presents opportunities for public charities considering SGO status, states deciding whether to participate, and individual donors seeking tax-efficient ways to give.

At the same time, the rules impose significant operational and compliance obligations, particularly for SGOs—which face income-based spending requirements, segregated account rules, and IRS reporting requirements—as well as states and donors subject to their own certification and eligibility requirements, underscoring the need for careful planning in the time remaining before the program takes effect.

Actions to consider

Tax-exempt organizations considering SGO status should determine whether they qualify as Section 501(c)(3) public charities, evaluate whether the relevant state has elected to participate, and assess their ability to meet key operating requirements, including the 90% scholarship-spending threshold, segregated account rules, and IRS reporting obligations.

Individual donors should determine if the recipient organization is on the IRS SGO list at the time of contribution, properly designate contributions as qualified at the time of the gift, maintain documentation to support the contribution, and understand how the credit interacts with state tax credits and the charitable contribution deduction.