Inside Treasury’s Proposed Scholarship Rules: What Catholic Education Leaders Should Know

Treasury’s October 1 proposed regulations provide a detailed implementation path for the Federal Scholarship Tax Credit, known in CEF communications as the Education Freedom Tax Credit. For Catholic education leaders, the proposal explains how donor contributions, SGO administration, and state certification would fit together.

Are these final regulations?

No. The attached document is a notice of proposed rulemaking, REG-117199-25, scheduled for Federal Register publication on October 2, 2026. Treasury’s announcement also describes companion temporary regulations establishing key procedures for states and SGOs preparing for launch.

The proposal contains a reliance provision: taxpayers, organizations, and states may rely on it for qualifying contributions made on or after January 1, 2027, before final regulations are published, provided they follow their applicable portions in their entirety and consistently. That condition matters; the proposal is not a menu of optional favorable provisions.

What changes for donor planning?

The proposal interprets the $1,700 annual limit per individual taxpayer. Married taxpayers filing jointly could claim a combined $3,400 when each spouse makes qualifying contributions of up to $1,700. Donors could contribute to an eligible SGO regardless of their own state of residence.

It also explains that state credits for qualifying contributions would be subtracted before the federal annual limit is applied. The federal credit remains nonrefundable, with allowable unused amounts subject to a five-year carryforward and tax-liability rules.

How would states complete participation?

The proposed 2027 transition process requires an advance election by January 1, 2027, and permits the state to complete its election by submitting its SGO list by February 15, 2027. Certification of qualifying organizations remains separate from the initial decision to participate.

The proposal contemplates multistate SGOs and an IRS list that donors generally could consult to confirm a recipient’s status. Catholic institutions should verify the actual SGO serving their state rather than rely on a national brand name alone.

What safeguards apply to scholarship organizations?

The statutory framework requires separate accounts for qualifying contributions, at least ten scholarship students who do not all attend the same school, and spending at least 90% of income on scholarships under the applicable rules. It requires verification of household income and family size and prohibits earmarking contributions for a particular student.

The proposal elaborates on administration and recordkeeping. These requirements support a central point for school leaders: credit-supported scholarship fundraising needs an eligible SGO structure, not simply a school donation page.

How would donor records work?

The proposal calls for an SGO to provide a timely written acknowledgment, including a unique donor number, no later than January 31 following the contribution year. It describes donor reporting on Form 8525, Federal Scholarship Tax Credit, or a successor form.

The unique donor number is intended to support matching contributions without requiring the donor to provide a taxpayer identification number to the SGO for that reporting process. Donors should retain both acknowledgments and payment records and follow the eventual form instructions.

What do digital wallets and expense rules mean?

The proposal would allow a qualified digital wallet as an expense-verification mechanism. Such a system would manage approved purchases, track expenses, and use controls such as preapproved vendors, direct payment, or timely receipts. It is a compliance approach, rather than unrestricted spending money for families.

The proposal notes planned further guidance on qualified expenses and the meaning of school under section 530. Catholic schools and home-education providers should verify specific classifications and expenses before promising coverage.

What should leaders do next?

Review the proposal with the administering SGO, prepare institutional information, and assign someone to update communications as guidance develops. The document announces a public hearing for December 15, 2026, at 10 a.m. Eastern, subject to its conditions; comment deadlines should be checked in the published notice.

Begin preparing with CEF and read our joint-filing announcement.

Sources and guidance status

Reviewed October 1, 2026. Sources: Treasury and IRS proposed regulations, REG-117199-25 (advance publication PDF supplied to CEF; scheduled publication October 2, 2026), including the statutory background and explanation of provisions.

Proposed provisions are identified as proposed; actual giving and scholarship participation require verification of the applicable rules and recipient eligibility. Tax outcomes depend on individual circumstances.