Updated on October 16, 2026 by David Korpel

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Starting January 1, 2027, a new federal tax credit lets eligible individuals receive up to $1,700 a year for qualifying cash contributions to approved scholarship-granting organizations. Under Treasury’s proposed rules, married couples filing jointly may qualify for up to $3,400, with each spouse’s credit based on that spouse’s own qualifying contributions. The program is called the Education Freedom Tax Credit, or Federal Scholarship Tax Credit. It helps fund scholarships for eligible students’ K-12 education expenses.

This is a donation credit. Parents don’t get it just because they pay tuition, buy school supplies, or have a school-age child. Donors claim the tax credit, and eligible families apply separately to participating organizations for scholarships.

Here is how the program works, what taxpayers should watch for, and how families may benefit.

What Is the Education Freedom Tax Credit?

The credit was enacted in 2025 under Section 25F of the Internal Revenue Code. It applies to qualifying cash contributions beginning January 1, 2027. Donors will claim contributions made during 2027 on their 2027 federal income tax return, generally filed in 2028.

The program involves three distinct participants:

• Donors contribute cash to approved scholarship-granting organizations and claim the federal tax credit.
• Scholarship-granting organizations, commonly called SGOs, use those contributions to award scholarships.
• Eligible students and families apply to SGOs for assistance with qualifying education expenses.

A contribution doesn’t automatically produce a scholarship for the donor’s own child. Donors may not earmark qualifying contributions for a particular student.

How Much Is the Credit?

• Eligible individual: up to $1,700 a year.
• Married couple filing jointly: up to $3,400, based on each spouse’s own qualifying contributions.

Treasury’s proposed rules allow each spouse to claim up to $1,700 based on that spouse’s contributions. Accordingly, couples should not assume that a contribution attributed entirely to one spouse automatically qualifies for the full $3,400 joint-return maximum.

Unlike a deduction, which reduces taxable income, a tax credit reduces federal income tax dollar for dollar. For example, a taxpayer who makes a $1,700 qualifying contribution and has sufficient federal income tax liability could receive a $1,700 federal credit, assuming no reduction for a state credit on the same contribution.

The maximum credit is not a limit on how much someone may donate. It is also not a limit on the scholarship an eligible student may receive. SGOs determine scholarship amounts based on their available funds, mission, and the student’s qualified expenses; awards cannot exceed the expenses they cover.

The Credit Is Nonrefundable—but Unused Amounts Can Carry Forward

The credit is nonrefundable. That means it can reduce federal income tax liability to zero, but any amount that exceeds the taxpayer’s tax liability isn’t paid out as an additional refundable credit. Unused credit may be carried forward for up to five years.

For example, if a taxpayer qualifies for a $1,700 credit but can use only $1,000 against the current year’s federal income tax liability, the remaining $700 may be carried forward, subject to the applicable rules.

This distinction matters when evaluating the benefit. The donation requires an actual cash payment to the SGO, while the timing of the tax benefit depends on the taxpayer’s ability to use the credit.

Who Can Claim the Credit?

U.S. citizens and residents who make qualifying cash contributions to an eligible SGO may claim the credit. Donors do not need to itemize deductions to qualify.

A donor also does not have to live in a participating state. Taxpayers may contribute to an eligible SGO in any participating state, even if their own state has not opted into the program. However, the scholarships funded by those contributions must serve eligible students residing in a state where the SGO is listed.

That creates an important distinction:

• For donors, living in a nonparticipating state does not necessarily prevent claiming the federal credit.
• For students, scholarship access depends on state participation and the SGO’s approved service area.

What Contributions Qualify?

The credit applies to qualifying cash contributions to approved SGOs. Not every donation to a school, education nonprofit, or existing scholarship organization will qualify. The organization must meet the program’s requirements and appear on the applicable IRS SGO list.

Treasury’s FAQ outlines several practical requirements for donors:

1. Check the IRS SGO list before contributing.
2. Tell the SGO at the time of the donation that the contribution is intended to qualify for the federal credit.
3. Do not earmark the contribution for a particular student.
4. Keep the SGO’s written acknowledgment, including the donor’s unique donor number.
5. Use that acknowledgment when claiming the credit on the federal income tax return.

The SGO must provide the acknowledgment by January 31 of the following year. For a qualifying contribution made in 2027, that means January 31, 2028.

Because the credit specifically requires cash contributions, taxpayers should not assume that donating securities, property, or other noncash assets qualifies.

How Does the Federal Credit Interact With State Tax Credits?

Taxpayers cannot simply add a full state tax credit to a full federal credit for the same contribution without accounting for the coordination rules.

State tax credits claimed for the same qualifying contributions reduce the contribution amount eligible for the federal credit before the $1,700 per-person federal cap applies.

Consider these simplified examples for one eligible individual, assuming sufficient federal tax liability and no other limitations:

These examples illustrate Treasury’s stated ordering rule: subtract the state credit from the qualifying contribution amount first, then apply the federal annual cap.

For taxpayers participating in an existing state scholarship tax-credit program, review this interaction carefully before contributing.

Can the Same Contribution Also Generate a Charitable Deduction?

A donor cannot claim a federal charitable contribution deduction for the portion of a contribution used for this credit. The same contribution amount cannot generate both benefits.

For example, if a taxpayer makes a $1,700 qualifying contribution and uses the entire amount for the federal credit, that same $1,700 cannot also be claimed as a federal charitable deduction.

Larger donations or contributions involving state tax benefits require a separate review of the applicable charitable deduction rules. Taxpayers should not assume that every dollar exceeding the federal credit automatically becomes deductible.

Which Students May Qualify for Scholarships?

A student generally must:

• Be eligible to enroll in a public elementary or secondary school.
• Live in a household whose prior-year income does not exceed 300% of the area’s median gross income, adjusted for family size.
• Meet the applicable state-residency and SGO requirements.

The income threshold is not a single nationwide dollar amount. It depends on the relevant area median income and family size. It also applies to scholarship recipients’ households—not as an income test for donors claiming the credit.

Treasury’s proposed regulations provide streamlined eligibility verification for certain groups, including foster children, households participating in specified needs-based programs, and certain students receiving school-based special education or tutoring services in low-income areas.

Meeting the eligibility requirements does not guarantee an award. Scholarships depend on available SGO funding, application procedures, and the organization’s scholarship decisions.

What Can Scholarships Pay For?

The program is broader than private-school tuition. Scholarships may cover qualified expenses connected with, or required by, attendance at a K–12 public, private (including religious), or charter school.

Examples include:

• Tuition and fees.
• Academic tutoring.
• Special education services for students with disabilities.
• Books and supplies.
• Qualifying extended-day programs.
• Computers and other qualifying equipment connected with enrollment or attendance.

This means a student attending a local public school may benefit from a scholarship for tutoring or other qualifying educational support without changing schools. The assistance available will vary based on the SGO’s mission, funding, and the student’s qualifying expenses.

Families should not assume that every education-related purchase qualifies or that every SGO funds every permitted expense.

Are Scholarships Taxable to the Family?

Qualifying scholarships under the program are excluded from federal taxable income. A family does not need to owe federal income tax to benefit from receiving a scholarship.

This is separate from the donor’s tax treatment. The donor receives a nonrefundable tax credit, while the eligible student receives scholarship assistance through the SGO.

Families also do not need to make a donation themselves to apply for a scholarship. Donating and receiving scholarship assistance are separate parts of the program, and qualifying contributions cannot be designated for a particular student.

What Makes an Organization an Eligible SGO?

An SGO must be a qualifying public charity and satisfy specific operational requirements. According to Treasury’s FAQ, qualifying organizations must:

• Meet a 90% scholarship-spending requirement.
• Keep qualifying contributions in separate accounts.
• Provide scholarships to at least 10 students who do not all attend the same school.
• Appear on a participating state’s SGO list.
• Meet additional program requirements.

The proposed and temporary regulations also establish reporting, verification, and audit requirements intended to protect donors and scholarship funds. The framework includes unique donor numbers that avoid requiring SGOs to collect donors’ Social Security numbers.

An organization’s existing charitable status—or its approval under a state scholarship program—should not be treated as sufficient proof that a donation qualifies for this new federal credit. Donors should verify its federal-program listing before contributing.

Why State Participation Matters

Participation is voluntary for states and the District of Columbia. A state must elect to participate and identify qualifying SGOs before organizations in that state can participate in the program.

For the 2027 launch, Treasury’s FAQ identifies these deadlines:

These state deadlines do not eliminate the donor’s responsibility to confirm that the receiving organization qualifies before making a contribution.

What This Means for Pennsylvania Taxpayers

Pennsylvania families’ ability to receive scholarships through this federal program depends on Pennsylvania participating and qualifying SGOs being listed. Treasury’s FAQ discusses Pennsylvania conditionally; that discussion is not confirmation that Pennsylvania has opted in.

Pennsylvania donors, however, may support an approved SGO in another participating state and potentially claim the federal credit even if Pennsylvania does not participate. Donors using a Pennsylvania scholarship tax-credit arrangement should separately verify federal SGO eligibility and review the state-credit coordination rules before assuming the donation qualifies for both programs.

What Is Final, and What Is Still Being Implemented?

The credit has been enacted, but implementation details remain important.

On October 1, 2026, Treasury and the IRS released proposed regulations addressing the credit and companion temporary regulations covering launch procedures, including state elections, SGO certification, registration, donor acknowledgments, and contribution reporting.

Treasury states that taxpayers, SGOs, and states may rely on the proposed regulations for qualifying contributions beginning January 1, 2027, before final regulations are published, provided they follow all applicable provisions consistently and in full.

Accordingly, taxpayers should distinguish between the enacted credit and the detailed rules currently provided through proposed and temporary regulations. State participation, approved SGO lists, and final filing procedures should be checked as the program launches.

A Practical Checklist Before Donating

Before making a contribution intended to qualify for the credit:

• Confirm the donation will be made on or after January 1, 2027.
• Verify the organization’s eligibility on the IRS SGO list.
• Tell the organization that the donation is intended to qualify for the federal credit.
• For married couples seeking the full joint-return maximum, document each spouse’s own qualifying contributions.
• Review whether a state tax credit applies to the same contribution.
• Consider whether sufficient federal tax liability exists to use the credit immediately.
• Keep the required acknowledgment and unique donor number.
• Avoid claiming a charitable deduction for the contribution portion used for the federal credit.

For families seeking assistance, the process is different: identify participating SGOs serving eligible students in your state, review their application requirements, and ask which expenses their scholarships cover. Eligibility alone does not guarantee funding.

Stay Up to Date on Participating States

State participation is an important piece of this program, and the list may change as additional states opt in. For the latest information, visit the IRS Federal Scholarship Tax Credit page, which publishes the list of states that have elected to participate for 2027. Check the date shown with the list to see how current it is.

The Bottom Line

The Education Freedom Tax Credit creates a new way for individuals to support K–12 scholarships while potentially reducing their federal income taxes. Families may benefit through scholarship assistance for tuition, tutoring, special education services, and other qualifying expenses—but they do not receive the donor’s tax credit simply by paying those costs themselves.

The opportunity is meaningful, but the details matter: approved organizations, each spouse’s contributions, state-credit coordination, available tax liability, and documentation all affect the result. Reviewing those items before contributing will help taxpayers avoid surprises when filing their returns.This article reflects Treasury and IRS guidance available as of October 15, 2026, including proposed and temporary regulations. It provides general information and is not a substitute for advice based on an individual taxpayer’s circumstances.

About The Author

David Korpel

After graduating from college, David jumped right into public accounting, where he first met Mike. This experience established a well-rounded technical foundation. He gained a wealth of experience traveling the country performing audits, reviews, compilations, and tax engagements before joining up with Mike again as ENGAGE’s first employee.

As Chief Operating Officer, Dave is in charge of keeping our client relationships as fun, informative, educational, and productive as possible. He aims to be supportive, informative, proactive, and trustworthy. Whether wearing his bookkeeping, tax, forensic accounting, or social media hat, his focus consistently remains on adding value for our clients. He is inspired by the innovation and entrepreneurial spirit of clients. His passion for helping small business owners make sense of their numbers and remove any stress and anxiety related to their financials and taxes is second only to the love for his family.

Dave’s wife, Laura, son Lincoln, and daughter Luna are his motivation every day to grow, learn, and love what he does. They live in Skippack, PA and can often be found hiking on another new trail in the area or walking into town for a bite to eat. And boy, are they a hungry bunch!