The new Federal Scholarship Tax Credit (also called the Education Freedom Tax Credit) lets you cut your federal income tax by up to $1,700 if you give cash to a K-12 scholarship granting organization in a state that has opted in. It starts with gifts made on or after January 1, 2027. The credit is nonrefundable, and you can't also deduct the same gift.
Key takeaways
- Treasury and the IRS released proposed rules on October 1, 2026. The credit covers cash gifts made on or after January 1, 2027.
- The credit is up to $1,700 per person. The IRS reads that as up to $3,400 on a joint return if each spouse gives and designates $1,700.
- It is nonrefundable: it can lower your tax to zero but won't create a refund. Unused credit carries forward up to five years.
- A state must opt in, and the group you give to must be on the IRS list. You can give to a group in another state.
- Public comments on the proposed rules are due December 1, 2026, and the IRS has scheduled a hearing for December 15, 2026.
A new federal tax credit for gifts to K-12 scholarship funds starts in 2027, and the IRS has now shown how it plans to run it. On October 1, 2026, Treasury and the IRS issued proposed rules for the credit, which the 2025 tax law created.
This is a credit for donors, not for families who get the scholarships. Here is how it works, what it could save you and what to do before the year ends.
What is the Federal Scholarship Tax Credit?
It is a credit for cash gifts to a scholarship granting organization, or SGO. That is a charity that gives scholarships for K-12 costs. The Treasury says those costs can include private-school tuition, tutoring, special-needs services, books, supplies and computers.
A credit is different from a deduction. A deduction lowers the income you are taxed on. A credit lowers the tax itself, dollar for dollar. A $1,000 credit cuts a $5,000 tax bill to $4,000.
The credit applies to taxable years ending after December 31, 2026, according to the proposed rules. In practice, that means gifts made in 2027.
How much is the credit worth?
The credit equals your qualified gifts for the year, up to $1,700. The proposed rules read that limit as per person. So a married couple filing jointly could claim up to $3,400, but only if each spouse made qualified gifts of up to $1,700.
If you also get a state credit for the same gift, the proposed rules subtract the state credit first and then apply the $1,700 limit. That is better for donors than the other order, which would shrink the federal credit.
Illustration: You give $2,500 to an SGO and claim a $500 state credit for that gift.
- $2,500 − $500 state credit = $2,000
- The lesser of $2,000 and $1,700 = $1,700 federal credit
If the cap were applied before the state credit, the result would be $1,700 − $500 = $1,200. The IRS chose the first method. These are made-up numbers, and only a state that offers such a credit would apply.
What are the main rules?
| Rule | What the proposed regulations say |
|---|---|
| Start date | Gifts made on or after January 1, 2027 |
| Credit limit | $1,700 per individual taxpayer |
| Type of gift | Cash, including check, card, electronic transfer or after-tax payroll deduction; digital assets don’t count |
| Refundable? | No. It can’t exceed your tax for the year |
| Carryforward | Unused credit can carry forward up to five years |
| Deduction | The same gift can’t also be a charitable deduction |
| Where you give | Any SGO on the IRS list, even in another state |
| Student income | Scholarship families must be at or below 300% of area median income, verified by the SGO |
You also have to tell the SGO, when you give, that the gift is meant as a qualified contribution. Any goods or services you get back reduce the amount that counts.
Which states are in?
Participation is voluntary. A state has to opt in and give the IRS a list of approved SGOs. Treasury said on October 1, 2026 that 30 states had opted in and urged all 50 to join.
Because you can give to a listed SGO in any participating state, your own state doesn’t have to take part. The IRS will keep the official SGO list, so check it before you give.
What if the credit is more than I owe?
Since the credit is nonrefundable, it only helps up to your federal income tax. Say your tax after other credits is $1,200 and you give $1,700. You use $1,200 now, and the other $500 carries forward to next year.
That makes it worth a quick look at your expected tax bill. Our income tax calculator can give you a rough number, and the 2026 tax numbers page lists current brackets and deductions. If you want to see how a payroll change would affect take-home pay, try the paycheck calculator.
What are the open questions?
These are proposed rules, not final ones. The IRS accepts public comments until December 1, 2026, and a public hearing is set for December 15, 2026, at 10 a.m. Eastern. Final rules could change details.
Treasury and the IRS say taxpayers, states and SGOs may rely on the proposed rules for gifts starting January 1, 2027. Treasury also projects that by 2030 the program could involve 600 to 700 SGOs and about 11 million donors. Those are government projections, not promises.
What to do now
- Check whether your state opted in and whether SGOs there are listed. Start at your state treasury or tax department.
- Decide if you want to give. The credit is only useful if you owe federal income tax. Estimate that first.
- Wait until January 1, 2027 to give. Gifts made before then don’t qualify under the proposed rules.
- Designate the gift in writing to the SGO as a qualified contribution, and keep the receipt.
- Talk to a tax preparer if you plan to give more than $1,700, live in a state with its own credit, or itemize deductions.
- Watch for final rules after the December comment period.
This post is general information, not tax advice.
Frequently asked questions
What is the Federal Scholarship Tax Credit?
It is a new federal income tax credit, section 25F of the tax code, for cash gifts to scholarship granting organizations. Those groups pay for K-12 expenses such as private-school tuition, tutoring and special-needs services. The credit is up to $1,700 per taxpayer and applies to taxable years ending after December 31, 2026.
How much is the scholarship tax credit worth?
Up to $1,700 per individual taxpayer, dollar for dollar against your federal income tax. The IRS and Treasury interpret that to allow up to $3,400 on a joint return, as long as each spouse made qualified gifts of up to $1,700. The credit can't be larger than the tax you owe that year.
Is the scholarship tax credit refundable?
No. It is nonrefundable, so it can reduce your federal income tax to zero but can't produce a refund by itself. If your credit is bigger than the tax you owe, the unused part can be carried forward. The proposed rules limit the carryforward to the five years after the year the credit arose.
Can I deduct the donation and take the credit?
Not for the same dollars. The law says a gift used for the credit can't also count as a charitable contribution deduction. If you give more than you claim as a credit, the proposed rules let you designate which part is the qualified contribution, so ask your tax preparer how the rest is treated.
Does my state have to take part?
Yes, states choose whether to opt in, and each opted-in state names the scholarship groups in it. Treasury said 30 states had opted in as of October 1, 2026. You can give to a listed group in any participating state, whatever state you live in.
Are the rules final?
Not yet. The IRS published them as proposed regulations on October 2, 2026, with comments due December 1, 2026. Treasury and the IRS say taxpayers, states and scholarship groups may rely on the proposed rules for gifts starting January 1, 2027. Final rules could still change details.