The U.S. Treasury Department and the IRS released proposed rules on Thursday, October 1, for the Education Freedom Tax Credit, the new federal tax break for donations that fund K-12 scholarships. The credit takes effect January 1, 2027.
Under the rules, a taxpayer can claim a credit of up to $1,700 a year for cash donations to approved scholarship groups, or up to $3,400 for a married couple filing jointly. Because it is a credit, it lowers a donor's federal income tax dollar for dollar. The groups then give the money to families as scholarships for private school tuition, tutoring, special education services, books, computers, and other school costs.
The credit only works in states that opt in, and 30 have so far, according to Treasury. Those states enroll about 26.7 million of the 49.1 million students in U.S. public schools, or 54%, according to allk12's analysis of federal data. Several of the largest states, including California, New York, Illinois, Pennsylvania, and New Jersey, are not on the list.
The 30 states that have opted-in include Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.
"Thirty states have already opted in, and we encourage all 50 states to participate so every American student and family can benefit," Treasury Secretary Scott Bessent said.
How it would work
A state that wants in has to file an advance election with the IRS, on Form 15714, by January 1, 2027, and send in a list of approved scholarship granting organizations by February 15, 2027. Those organizations must be nonprofit public charities. They have to spend at least 90% of their income on scholarships, keep the donations in separate accounts, and give scholarships to at least 10 students who do not all attend the same school, according to a Treasury fact sheet.
Donors tell the group the gift is meant for the credit, keep the group's written acknowledgment, and claim the credit on their tax return. Donors can give to a group in any participating state, even if their own state has not opted in. The credit is nonrefundable, so it can cut a tax bill to zero but will not produce a refund. Unused credit carries forward for up to five years.
Students qualify if they are eligible to attend a public school and their household income the year before was no more than 300% of the area's median income, adjusted for family size. Treasury estimates about 95% of American children live in households under that limit. Under the proposed rules, including simpler verification for foster children and families in some needs-based programs, about 96% of children in participating states would qualify, Treasury said.
What the rules would change
- States could not narrow the program. A participating state could not impose stricter requirements on scholarship groups than federal law does, including limits on the type of school a student attends or what scholarships pay for.
- Multistate groups could join. A group whose work is at least 85% scholarship granting would qualify for a safe harbor. Treasury estimates that could add about 450 organizations and up to $3 billion a year in donations.
- State and federal credits would stack in order. State tax credits claimed for the same gift reduce the amount that counts toward the federal $1,700 cap.
- New anti-fraud reporting. The IRS would set up portals for states and groups, assign donors unique numbers so groups do not collect Social Security numbers, and require annual reports and audits.
By 2030, Treasury and the IRS estimate more than 11 million taxpayers could give nearly $26 billion a year to 600 to 700 scholarship groups. Treasury's fact sheet says that could fund about 2 million full-time scholarships of $12,000 each, or 5 million part-time scholarships of $4,500 each.
The debate
Critics say the money will mostly help families who already pay for private school. "This money will disproportionately flow to private school families, and to the extent it flows to public school families, it will disproportionately flow to better off families," Jon Valant, director of the Brown Center on Education Policy at the Brookings Institution, told Chalkbeat.
Some public school groups plan to use it anyway, for tutoring and after-school programs. "I believe there's money on the table, and public school students should benefit from that," said Sara Hazel, president and CEO of the Denver Public Schools Foundation.
Treasury says the credit does not take money from public schools because it relies on voluntary donations, not state or local tax dollars.
The proposed rules are scheduled to be published in the Federal Register on October 2. Public comments are due 60 days after publication, and a public hearing is set for Tuesday, December 15, 2026. Taxpayers, states, and scholarship groups can rely on the proposed rules for donations made starting January 1, 2027, before the final version is issued.
Sources
U.S. Department of the Treasury: The Trump Administration Advances the Establishment of America's First Nationwide School Choice Program
Federal Register: Federal Scholarship Tax Credit, notice of proposed rulemaking and public hearing (2026-20277)
Federal Register: Federal Scholarship Tax Credit, temporary regulations (2026-20264)
U.S. Department of the Treasury: Fact Sheet, President Trump Delivers Affordable School Choice Options Through Education Freedom Tax Credit
Chalkbeat: Public schools see 'money on the table' in education tax credit designed for private school choice
Enrollment figures from allk12's analysis of National Center for Education Statistics (NCES) Common Core of Data, 2024-25.
