Who qualifies for the education freedom tax credit? How the $1,700 federal scholarship tax credit works

What the new IRS rules on the education freedom tax credit do

On October 1, 2026, Treasury and the IRS announced two sets of rules for what the IRS calls the federal scholarship tax credit, better known as the education freedom tax credit. The administration calls it the first nationwide school choice program. Congress created it in section 25F of the tax code, part of the One, Big, Beautiful Bill Act signed July 4, 2025, the same law that created Trump accounts for children. Both documents appeared in the Federal Register on October 2: temporary rules that tell states and scholarship groups how to sign up and report, and a longer set of proposed rules covering who can claim the credit, which groups qualify and which students can get scholarships.

The temporary rules take effect December 1, 2026, apply from September 1 so states and scholarship groups can start setting up now, and expire October 1, 2029. The proposed rules are not final, but the IRS says donors, scholarship groups and states may rely on them for gifts made on or after January 1, 2027, as long as they follow them in full. Comments are due December 1, 2026, and a public hearing is set for December 15. A tax lawyer can tell you how the credit fits with the rest of your return before you give.

How much do you get back from the $1,700 tax credit?

The credit equals the cash you give, up to $1,700 a year, so a $1,700 gift can come back in full. It is nonrefundable: it can lower your federal income tax to zero but cannot create a refund on its own. If your credit is more than the tax you owe, the proposed rules let you carry the unused part forward for up to five years, oldest credits first.

Treasury reads the $1,700 cap as applying to each spouse, so a married couple filing jointly can claim up to $3,400 if each of them gives at least $1,700. If your state also gives you a tax credit for the same gift, the federal credit shrinks by the state credit first, and only then is the $1,700 cap applied. A state tax deduction, as opposed to a credit, generally does not reduce it. You can't also deduct the credited part of the gift as a charitable donation, but anything you give above the credited amount may still be deductible under the usual charity rules.

Only cash counts: checks, cards, electronic transfers and after-tax payroll deductions, in U.S. dollars, and never cryptocurrency or other digital assets. You must tell the scholarship group when you give that the gift is a qualified contribution, so it goes into the separate account the law requires. Gifts made through a partnership or an S corporation do not qualify. A gift counts for the year you make it, so to claim the credit for 2027, give by December 31, 2027.

$1,700

top federal credit per person each year, from 2027

$3,400

top credit for a married couple when each spouse gives

5 years

how long an unused credit can carry forward

Who qualifies for the education freedom tax credit

If you're a U.S. citizen or resident, you can claim it, even without children in school. You can give to a group in any participating state, not just your own, and if the group is on the IRS list of scholarship granting organizations the day you give, you can count on it qualifying, unless you knew it didn't qualify or were involved in what got it removed.

Scholarships can go to any child who could enroll in a public K-12 school, if the household earned no more than 300% of the area median income in the year before applying. That's the same local income figure used for federal housing help. The proposed rules would count only cash income, leaving out things like home equity, and would let a scholarship group accept a recent SNAP, cash assistance (TANF), WIC, Section 8 or SSI award letter instead of pay stubs or tax returns. Foster children would be treated as meeting the income test. Treasury estimates that about 96% of children in participating states would be eligible, according to the IRS announcement.

The student must live in the state that lists the scholarship group, with exceptions for children of military members and families living on Indian lands. A scholarship group can choose to serve a narrower group, such as only lower-income families, so eligibility under the law doesn't guarantee an award. If a school or scholarship dispute affects your child, an education lawyer can explain your options.

Does your state have to opt in to the federal scholarship tax credit?

Only for families. If you're giving, your own state doesn't need to take part: a gift earns the credit as long as the scholarship group is listed by a state that opted in. The governor, or whoever state law designates, makes the choice. As of September 14, 2026, the IRS listed 30 states that had opted in early for 2027: 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. Treasury Secretary Scott Bessent gave the same count, 30 states, in the October 1 announcement. The IRS's published lists are the ones to check before you give.

For 2027, a state that has not yet opted in must file its advance election on IRS Form 15714 by January 1, 2027, under the temporary rules, and every participating state must send in its list of scholarship groups by February 15, 2027. Each year's choice stands alone: a state can sit out a later year, but once its election for a year is complete, it can't take it back.

Families in a non-participating state can't get these scholarships, because students must live in the listing state. The proposed rules would also stop participating states from adding stricter requirements for scholarship groups, including limits on the type of school a scholarship can pay for.

How you claim it: donor numbers, receipts and Form 8525

Each scholarship group must register on a new IRS portal and give every donor a unique donor number, so donors don't have to hand over a Social Security number. By January 31 of the following year, the group must send you a written acknowledgment with its employer identification number, your total qualified gifts, your donor number and whether you got anything in return. It reports the same totals to the IRS by February 28.

Under the proposed rules, you'd claim the credit on new Form 8525, Federal Scholarship Tax Credit, listing the donor number from each group you gave to, as the law firm Dykema notes. For 2027 gifts, that's the return you file in 2028. If a donor number is missing, the IRS would treat it as if you made no qualifying gift to that group, unless you can show the acknowledgment or other proof. If you're weighing the credit as part of your charitable giving, estate planning attorneys often handle gift planning.

What can the scholarships pay for, and which scholarship granting organizations (SGOs) qualify?

Scholarships can pay for the same K-12 costs as a Coverdell education savings account. The IRS announcement lists private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other equipment, and other costs tied to a student's enrollment or attendance. Under a companion part of the law, section 139K, scholarships received after December 31, 2026, are not taxable income to the family, as the temporary rules explain.

Under the proposed rules, tuition and other school charges must be paid straight to the school, and a family can be paid back only for an approved expense it documents with a receipt. Treasury says it has had many requests for guidance on which expenses and schools count and intends to issue it as soon as possible. The proposed rules leave it to state law to say what counts as a K-12 school, so if you homeschool, whether that counts depends on your state.

How the education freedom tax credit got here

1. July 4, 2025

   The One, Big, Beautiful Bill Act becomes law and adds the scholarship credit as section 25F of the tax code.

2. November 25, 2025

   Treasury and the IRS ask for public comments in Notice 2025-70.

3. December 12, 2025

   Revenue Procedure 2026-6 lets states make an advance election to take part in 2027.

4. September 14, 2026

   The IRS lists 30 states that have opted in for 2027.

5. October 1, 2026

   Treasury and the IRS release the temporary and proposed rules.

6. October 2, 2026

   Both rules are published in the Federal Register.

7. December 1, 2026

   The temporary rules take effect, and comments on the proposed rules are due.

8. December 15, 2026

   Public hearing on the proposed rules, unless no one asks to speak.

9. January 1, 2027

   Gifts can start earning the credit. Last day for states to opt in for 2027.

10. February 15, 2027

    Participating states' lists of scholarship groups for 2027 are due.

What changes now, and what does not

Nothing you give in 2026 earns this credit. The first gifts that count are made on or after January 1, 2027, and the first returns that claim it are filed in 2028. Until then, the work falls on states and scholarship groups, which must register and set up their accounts and lists. As KPMG summarized, the temporary rules take effect December 1, 2026, and apply from September 1, 2026, so groups can prepare. If you're looking for a tax break on education costs this year, the American Opportunity and Lifetime Learning credits cover college and job-training costs, not K-12 scholarships.

What to check before you give or apply

A few lists and decisions the IRS hasn't published yet could change the answer for you. This is general information, not tax or legal advice, and if you don't have an adviser, we can help you find a lawyer.

1. The state: for families, whether your state is on the IRS list of participating states for 2027; for donors, whether the group's state is.
2. The group: whether it is on the IRS list of scholarship granting organizations on the day you give.
3. How you give: tell the group at the time that the gift is a qualified contribution, and pay in cash, not crypto.
4. State credits: whether your state gives its own tax credit for the same gift, which would reduce the federal credit.
5. Your paperwork: the written acknowledgment with your donor number, due by January 31, 2028, for 2027 gifts.
6. For families: the group's own income limit, which can be lower than 300% of area median income, and which expenses it pays.
7. Final rules: any change when Treasury finalizes the rules after the December 2026 comment period.