Starting in 2027, a new federal credit will let individuals give up to $1,700 a year to qualifying K–12 scholarship organizations and cut their federal income tax by the same amount. Created by the One Big Beautiful Bill Act as Internal Revenue Code section 25F, and often called the Education Freedom Tax Credit, it is one of the few places in the tax code where a gift can come back to you dollar for dollar. On October 1, 2026, Treasury and the IRS released the first rules for it.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
The Basics: $1,700 Per Taxpayer, Starting in 2027
Section 25F gives U.S. citizens and residents a credit equal to their qualified contributions for the year, capped at $1,700. The credit applies to taxable years ending after December 31, 2026, so for most individuals the first eligible gifts are those made in calendar year 2027. Under the regulations, spouses filing jointly are treated as separate taxpayers for the limit, so a married couple can claim up to $3,400 when each spouse makes a qualifying gift.
The credit is nonrefundable: it can reduce your federal income tax to zero but won't produce a refund on its own. Any unused amount carries forward for up to five years. Only cash counts. Gifts of appreciated stock or other property don't qualify.
Why Dollar-for-Dollar Matters
A normal charitable deduction only saves you your marginal rate. If you're in the top bracket, a $1,700 deduction saves roughly $630 in federal tax, and that's only if you itemize. A $1,700 credit cuts the tax itself by $1,700. With enough tax liability to absorb it, the gift costs you close to nothing federally.
The trade-off is that you can't double-dip. The statute says a contribution that generates the 25F credit cannot also be deducted as a charitable contribution under section 170. You get the credit or the deduction for that money, not both. Gifts above the cap follow the regular charitable rules.
States Have to Opt In
This is the catch most people miss: the credit is only available for gifts to SGOs in a covered state. A state becomes covered only when its governor, or another official named under state law, elects to participate and sends the IRS a list of qualifying scholarship granting organizations. The IRS reported that about 30 states had opted in as of early October 2026. Under the new temporary regulations, states joining for 2027 must elect by January 1, 2027, and submit their SGO list by February 15, 2027.
The regulations also limit how much a participating state can restrict the program. A state can't impose operating requirements stricter than the federal rules, and it can't use discretionary certification to keep out SGOs that otherwise qualify.
Interaction With State Scholarship Credits
Many states already offer their own tax credits for gifts to scholarship organizations. Section 25F reduces the federal credit by any state tax credit you claim for the same contribution. If your state gives you a credit for part of the gift, the federal credit covers only what's left.
What Makes an Organization an SGO
For nonprofits, the requirements are specific. Under the statute, an SGO must:
Be a 501(c)(3) public charity (not a private foundation) and appear on its state's list for the year.
Keep 25F contributions in separate accounts instead of mixing them with other funds.
Spend at least 90% of its income on scholarships, with awards going to at least 10 students.
Serve eligible students, meaning children eligible to enroll in public K–12 school whose household income doesn't exceed 300% of the area median gross income.
Not earmark gifts for a donor's chosen student and avoid self-dealing.
The proposed regulations add a safe harbor. An organization whose activities are at least 85% scholarship-granting can apply the 90% spending test to its segregated 25F account instead of the whole organization. SGOs will register through a new IRS portal and give each donor a unique donor number. They must also send donors a written acknowledgment by January 31 following the year of the gift.
Scholarships can pay for qualified elementary and secondary education expenses, using the same definition that applies to Coverdell education savings accounts. That covers tuition, tutoring, special-needs services, books, supplies, computer equipment, and other costs tied to a student's enrollment or attendance.
The October 2026 Regulations and What Comes Next
Treasury and the IRS released two packages on October 1, 2026, and both were published in the Federal Register on October 2. Temporary regulations cover state elections, state SGO lists, and contribution tracking. Proposed regulations (REG-117199-25) cover the credit itself and the SGO requirements. Donors are expected to claim the credit on a new Form 8525, listing the donor number from each SGO. Comments are due December 1, 2026, and a public hearing is scheduled for December 15, 2026. SGOs may rely on the proposed rules for 2027.
How VarStan Helps
We fold the Education Freedom Tax Credit into year-end and 2027 planning for owners and families, including how it fits with your charitable deductions, state credits, and multi-year carryforwards. For nonprofits weighing an SGO role, we help set up segregated accounting, track the 90% test, and build the acknowledgment process. If you want to know whether this credit belongs in your plan, or whether your organization should take it on, reach out and we'll walk through it with you.
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