IRS Issues New Section 25F Scholarship Tax Credit Rules for Scholarship Granting Organizations

Treasury and the IRS issued proposed and temporary regulations on October 1, 2026, for a new federal scholarship donation credit scheduled to start January 1, 2027. The package establishes rules for Section 25F, the federal Scholarship Tax Credit, also called the Education Freedom Tax Credit.

The proposed rules allow a nonrefundable credit of up to $1,700 per taxpayer. Married couples filing jointly could claim up to $3,400 if each spouse makes qualified contributions.

The Federal Register published the package on October 2, 2026. It includes temporary regulations, T.D. 10057, and proposed regulations, REG-117199-25. The proposals are not final regulations.

The rules set an administrative framework for the launch. State action will help determine where donations qualify.

State elections determine which donations can qualify

A governor or another authority designated by a state must elect to participate. The District of Columbia may also opt in. Donors can qualify only when the recipient organization appears on the participating jurisdiction’s approved list.

The temporary regulations set deadlines for state elections and for submitting those lists for 2027. A donor’s contribution does not qualify merely because the recipient organization meets federal requirements; the state must also take the required steps.

A state tax credit claimed for the same donation reduces the federal credit. The amount of the federal benefit therefore can be affected by a donor’s use of a state credit.

Organizations must meet charity and scholarship standards

Eligible recipients, known as Scholarship Granting Organizations (SGOs), generally must be section 501(c)(3) public charities. They must keep qualified contributions separate and spend at least 90 percent of their income on scholarships.

The rules also require registration through an IRS portal. Organizations must meet requirements covering scholarship activity, recordkeeping and reporting. The spending test and those administrative obligations set conditions for participating charities.

The program targets private donations funding scholarships for elementary and secondary education. The IRS described it as the first federal tax credit supporting private contributions for K-12 scholarships.

Only cash gifts qualify, and the credit cannot exceed tax owed

Only cash contributions qualify. Property and other in-kind gifts fall outside the credit’s stated contribution rules.

Because the credit is nonrefundable, it can lower federal income tax to zero but cannot generate a refund beyond a taxpayer’s liability. The proposed limits are maximums, not a guarantee that a donor will receive the full amount.

The credit applies to taxable years ending after December 31, 2026, and qualifying contributions can begin on January 1, 2027. Those dates describe separate parts of the rule: the first sets the taxable years covered, while the second marks when contributions can start qualifying.

For tax year 2027, 2026 is a setup year rather than a claim year. The stated start date is January 1, 2027; the rules do not make 2026 a year for claiming the credit.

Temporary rules give states and organizations time to prepare

The temporary regulations are scheduled to take effect 60 days after their Federal Register publication. They apply on or after September 1, 2026, and expire on October 1, 2029.

Taxpayers, organizations and states may rely on the proposed rules for contributions made on or after January 1, 2027, if they follow them consistently. That reliance option gives participants a framework for the launch while proposed provisions remain subject to the rulemaking process.

Congress enacted the credit in 2025. The IRS characterized the initiative as part of “America’s first nationwide school choice program.”

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.