Treasury Releases Long-Awaited Rules for Federal Education Freedom Tax Credit

The U.S. Department of the Treasury on Thursday released the long-awaited rules for the Education Freedom Tax Credit, the first federal scholarship tax credit, setting the stage for a launch on Jan. 1, 2027.

The regulations confirm that married couples filing jointly can claim up to $3,400, give governors binding instructions for certifying scholarship-granting organizations (SGOs), and make children in need-based programs like nutrition assistance automatically eligible.

Created by the 2025 tax and spending law signed by President Donald Trump under the Big Beautiful Bill, the program lets taxpayers claim a dollar-for-dollar federal credit for donations to SGOs. Those groups then fund K-12 scholarships for private school tuition, tutoring, books, supplies, extended-day programs, and disability services.

The stakes are large. Officials estimate the program could reach roughly $26 billion a year, more than Washington spends on Title I or special education, and serve over 2 million children by 2030.

Automatic eligibility for low-income families

Children already enrolled in a need-based government program, such as nutrition assistance, will qualify for scholarships automatically. Children in foster care will also be automatically eligible.

A Treasury official told reporters Wednesday that proof of enrollment in such a program is enough, with no extra paperwork required.

The provision matters because many observers expect the credit to benefit mostly private school families. Streamlined eligibility could make low-income families whose children stay in public schools more likely to apply for tutoring and other support.

How the credit works

Each taxpayer can claim a credit of up to $1,700, and Treasury confirmed there is no marriage penalty: both spouses on a joint return can claim the full amount, for $3,400 total. Supporters note that a single couple’s donation could cover more than two-thirds of a $5,000 scholarship.

The $1,700 cap applies to the donor’s credit, not to the size of a scholarship. Donors can give to an eligible SGO in any participating state, regardless of where they live, and SGOs cannot earmark gifts for a particular student.

Under the proposed rules, taxpayers who claim state tax credits can still claim the federal one. Unused credits can be carried forward for up to five years.

Scholarships are open to students in households earning up to 300% of their area’s median income. Treasury officials put that at about 95% of U.S. children, and Education Department officials said roughly 28 million children in the 30 participating states would qualify.

States face a Jan. 1 deadline

States must opt in by Jan. 1 and submit their lists of qualifying SGOs by Feb. 15. SGOs already registered in their state with the required paperwork can begin accepting donations on Jan. 1.

The rules give governors specific, legally binding instructions for submitting those lists. States must include every organization that meets federal requirements and cannot pick favorites, a Treasury official said. Nor can states restrict which schools families choose or which allowable expenses scholarships cover.

Thirty states have opted in so far, according to the IRS: Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

New York Gov. Kathy Hochul, a Democrat, has said she plans to join after reviewing the rules. Democratic governors in Hawaii, Minnesota, New Mexico and Oregon have said their states will not participate, and the governors of Arizona and Wisconsin vetoed bills that would have opted them in. In North Carolina and Kansas, Republican legislatures overrode Democratic governors’ vetoes to join.

Guardrails for scholarship organizations

Treasury laid out compliance, recordkeeping and reporting requirements meant to protect program integrity and give donors transparency. These proposed rules are now open for a 60-day public comment period. Under the law and rules, SGOs must:

• Be 501(c)(3) nonprofits that are not private foundations, and hold qualified contributions in separate accounts.
• Spend at least 90% of their income on scholarships.
• Serve at least 10 students who do not all attend the same school.
• Verify household income and family size.
• Give priority to returning scholarship recipients, then their siblings.
• Undergo annual financial and program audits and share the reports with their state.

Fraud protections include unique donor identification numbers and annual reporting. States can use the audits to remove noncompliant groups and catch problems such as duplicate payments for the same expense. Homeschools will be treated according to each state’s own law.

Officials expect donations to support 600 to 700 SGOs, plus as many as 450 organizations working across state lines that could bring in another $3 billion.

Still to come: eligible expenses

Thursday’s release did not settle every question. As expected, Treasury is defining eligible expenses through a separate rulemaking that has not yet been published, and advocates and states will be watching it closely.