The New Proposed Scholarship Tax Credit Regulations: A General Summary

Treasury and the IRS have released proposed regulations explaining how the new federal scholarship tax credit would work when it begins in 2027. The proposal covers who can claim the credit, how scholarship organizations must operate, which students may qualify, and what states must do to participate.

The program is called the Federal Scholarship Tax Credit in the regulations and the Education Freedom Tax Credit in CEF communications. Both refer to the credit established under section 25F of the Internal Revenue Code.

The main points at a glance

• Donors: Up to $1,700 per individual, with a potential combined $3,400 for married couples filing jointly when each spouse makes qualifying contributions.
• Families: Scholarships for eligible K–12 students from households earning no more than 300% of the applicable area median gross income.
• Scholarship organizations: Requirements for separate accounts, scholarship spending, student eligibility, and donor records.
• States: A voluntary participation process that includes certifying eligible scholarship granting organizations.
• Timing: The credit begins in 2027. The document is a proposal, with conditions for relying on it before final regulations are issued.

1. How the donor tax credit would work

The credit applies to qualifying cash contributions by eligible individual U.S. citizens or residents to scholarship granting organizations, or SGOs. It reduces federal income tax dollar-for-dollar, subject to the annual limit and other requirements.

Treasury interprets the $1,700 limit as applying separately to each spouse on a joint return. A married couple could therefore claim up to $3,400 when each spouse makes qualifying contributions of up to $1,700. Read our article on the joint-filing clarification for more detail.

The credit is nonrefundable: it cannot reduce applicable tax liability below zero. Allowable amounts left unused because of the tax-liability limit may carry forward for up to five years. State tax credits on the same qualifying contributions would be subtracted before applying the federal annual cap. The same contribution amount cannot generate both this federal credit and a federal charitable deduction.

2. What counts as a qualifying contribution

The proposal includes checks, electronic transfers, credit or debit card payments, and certain other U.S.-dollar payment methods within its definition of cash. Digital assets would not qualify. Donors would identify their contributions for the federal scholarship program at the time they give.

Donors could support an eligible SGO regardless of their own state of residence. The recipient must still qualify under the program, and scholarship funds must serve the appropriate participating state. Paying tuition directly to a school does not itself qualify for this donor credit.

3. Which students and expenses may qualify

The statutory student eligibility criteria include household income of no more than 300% of the applicable area median gross income and eligibility to enroll in a public elementary or secondary school. Household size and location matter; there is no single nationwide income cutoff.

Scholarships must pay qualified elementary or secondary educational expenses under the referenced federal education-expense rules. Tuition can qualify, along with other expenses that meet the relevant conditions. Eligibility does not guarantee an award, and individual SGOs may have a narrower scholarship mission.

The proposal also notes that further guidance on qualified expenses and the meaning of “school” is intended. Families should verify specific expenses and school classifications with the administering program.

4. How scholarship organizations would be accountable

The federal framework requires qualifying SGOs to be eligible public charities, maintain separate accounts for qualifying contributions, and provide scholarships to at least ten students who do not all attend the same school. It also requires scholarship spending of at least 90% of income under the applicable rules.

SGOs must verify household income and family size. Contributions cannot be earmarked for a particular student. Scholarship priorities include previous recipients and then eligible siblings under the statutory rules.

The proposal would permit qualified digital wallets to help verify scholarship spending through controls such as approved vendors, direct payments, and timely receipts.

5. What states would need to do

States choose whether to participate and must certify qualifying SGOs. For 2027, the proposal describes an advance-election deadline of January 1, followed by a February 15 deadline to submit the state’s SGO list and complete that election.

The proposal would allow multistate SGOs, with separate accounts for the participating states they serve. It would also prohibit states from imposing additional SGO restrictions beyond the specified federal framework, such as narrowing eligible school types or qualified expense categories, while retaining generally applicable charity requirements and safeguards against fraud.

6. What records donors would receive

SGOs would provide written acknowledgments with unique donor numbers by January 31 following the contribution year. The proposal describes reporting the credit on Form 8525, or a successor form, using information from those acknowledgments.

Donors generally could rely on the IRS SGO list to check a recipient’s status when contributing, subject to exceptions involving knowledge of noncompliance.

What happens next?

The proposed regulations, REG-117199-25, are scheduled for Federal Register publication on October 2, 2026, followed by public comment. They are not final regulations. The document allows reliance for qualifying contributions beginning January 1, 2027, before final regulations are published, provided the applicable provisions are followed in their entirety and consistently.

For Catholic education, the proposal offers a clearer picture of how donations can become scholarships. Subscribe to CEF updates as the program moves toward launch.

Source: Treasury and IRS, Federal Scholarship Tax Credit, REG-117199-25, advance publication document reviewed October 1, 2026. This overview distinguishes existing statutory requirements from proposed implementation provisions.