- Temporary regulations take effect December 1, 2026; comments are due that day.
- SGOs must devote at least 90% of income to scholarships.
- States’ 2027 SGO lists are due February 15.
Checked against the IRS
Catholic education leaders are promoting a federal tax credit for scholarship donations that begins January 1, 2027. Individual taxpayers may claim a nonrefundable federal income tax credit for qualifying cash contributions to eligible scholarship organizations.
The program is designed to fund scholarships for eligible K–12 students, including those attending Catholic schools. State participation will determine where qualifying organizations can operate, while donations will determine how much scholarship aid they can offer.
Treasury and the IRS call the program the Education Freedom Tax Credit. It rewards contributions to Scholarship Granting Organizations, or SGOs, rather than paying a credit directly to families for tuition.
Donors can claim up to $1,700 for qualifying gifts
The law gives an individual taxpayer a credit of up to $1,700 for qualifying cash contributions to an eligible SGO. Married taxpayers filing jointly may claim up to $3,400 when each spouse makes a qualifying contribution.
A credit reduces federal income tax owed dollar for dollar. It is nonrefundable, and proposed rules would let taxpayers carry unused credit forward for up to five years.
Congress created the credit through Section 70411 of Public Law 119-21, which enacted Internal Revenue Code section 25F on July 4, 2025. The same law added section 139K, excluding qualifying scholarship amounts received by students or their dependents from gross income.
The proposed rules prevent a taxpayer from claiming a charitable deduction for the same amount claimed as a credit. They also set an ordering rule for people who qualify for both a state credit and the federal one: the state credit first reduces the qualifying contribution, then the federal limit applies. In Treasury’s example, a $2,500 contribution less a $500 state credit leaves $2,000, with the federal credit capped at $1,700.
Temporary rules take effect before the credit launches
Treasury and the IRS released proposed regulations and companion temporary regulations on October 1, 2026. The temporary regulations take effect December 1, 2026, while the credit itself starts January 1, 2027.
Taxpayers and organizations may use the proposed rules for qualifying contributions made in 2027 if they follow those rules in full. The IRS identifies January 1, 2027, as the launch date. Comments on the proposed regulations are due December 1, 2026.
The proposed rules also say participating states cannot impose SGO operating requirements stricter than those in section 25F. That restriction includes state limits on the kinds of schools students may attend or the qualified education expenses scholarships may cover.
Student eligibility is broad, but scholarship size depends on fundraising
To qualify, students must be eligible to enroll in public school and live in households with income at or below 300% of area median income. Scholarships may support qualifying K–12 expenses, including private-school tuition and tutoring, as well as special-needs services, books, supplies, computers and other equipment.
Treasury plans separate guidance on what counts as a school and which expenses qualify, while Massachusetts had not decided whether to participate as of October 25, 2026.
SGOs must devote at least 90% of income to scholarships under the proposed rules. The rules define income as gross receipts from all sources, before expenses.
Sister Dale McDonald, vice president of public policy for the National Catholic Educational Association, said the available funds will shape whether scholarships can help families afford a school. She said:
“The big challenge is, how much money can the SGOs (scholarship granting organizations) raise to be able to have something to give in scholarship aid?”
Shawn Peterson, president of Catholic Education Partners, said increased enrollment will take time rather than arrive immediately. He expects the national program to create fundraising potential, but scholarship amounts will depend on what organizations raise and distribute.
State choices determine which organizations qualify
States may opt in and identify eligible SGOs. A taxpayer can contribute to an eligible organization in a participating state even if the donor lives elsewhere.
For 2027, states must make advance participation elections by January 1 and provide their SGO lists by February 15. SGOs generally must be 501(c)(3) public charities and appear on the applicable state list.
New York Gov. Kathy Hochul announced on October 9, 2026, that her state would participate. The move could make the program available to more than 2.7 million public, parochial and private school students in New York. Peterson called the program an opportunity for New Yorkers to experience school choice.
Treasury Secretary Scott Bessent said 30 states had opted in when the regulations were issued and urged all 50 states to join. The IRS directs donors to its Federal Scholarship Tax Credit page for participating states and the eligible SGO list. Potential donors can check those listings before making a qualifying contribution in 2027.
