Tax Planning

What the New Federal School Choice Credit Means for Your Family and Taxes

A new federal tax credit is set to create another way for taxpayers to support scholarships for elementary and secondary school students. The credit begins with qualified contributions made on or after January 1, 2027, but participation and eligibility rules will matter.

On October 1, 2026, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations for the Education Freedom Tax Credit under Internal Revenue Code Section 25F. The agencies also issued temporary regulations to help states and Scholarship Granting Organizations prepare for the program’s launch. 

How the new tax credit would work

An individual taxpayer may claim a nonrefundable federal income tax credit of up to $1,700 each year for qualified cash contributions to an eligible Scholarship Granting Organization. Married couples filing jointly may claim a combined credit of up to $3,400. A nonrefundable credit can reduce a taxpayer’s federal income tax liability to zero, but it cannot create a refund by itself. Under the proposed regulations, taxpayers could carry unused Education Freedom Tax Credit amounts forward for up to 5 years. This is a credit for contributions to qualifying scholarship organizations. It is not a direct tax credit for paying a child’s private-school tuition or other education expenses. The receiving organization would use qualified contributions to provide scholarships to eligible K–12 students. Scholarship funds may cover expenses such as:

• Private-school tuition
• Academic tutoring
• Special-needs services
• Books and school supplies
• Computers and other equipment
• Other qualifying enrollment or attendance expenses

State participation will affect the program

States must voluntarily elect to participate and identify eligible Scholarship Granting Organizations. According to the IRS announcement, 30 states had opted into the program as of October 1, 2026. Taxpayers would not necessarily be limited to organizations in their home state. The proposed rules allow taxpayers to contribute to an eligible organization serving a participating state, regardless of where the taxpayer lives. Before contributing, taxpayers should confirm that the state is participating and that the organization appears on the appropriate list of eligible scholarship organizations.

What the proposed rules mean for families

Scholarship availability will depend on several factors, including state participation, student eligibility, available funding, and the policies of the Scholarship Granting Organization. The proposed regulations include income-eligibility rules and streamlined verification procedures for some families. These include families participating in certain needs-based programs, foster children, and certain students receiving tutoring or special-needs services in low-income areas. Treasury and the IRS estimate that approximately 96% of children in participating states could qualify to receive scholarship funds under the proposed rules and safe harbors. Eligibility for a scholarship, however, does not guarantee that a family will receive an award. 

Recordkeeping and taxpayer protections

The proposed and temporary regulations include reporting, verification, and audit requirements intended to protect taxpayers and scholarship funds. Participating organizations would provide donor acknowledgments and report qualified contributions. The program would also use unique donor numbers so scholarship organizations would not need to collect donors’ Social Security numbers. Taxpayers should keep contribution receipts, donor acknowledgments, and other supporting records with their tax documents. They should also verify an organization’s eligibility before making a contribution and avoid relying only on promotional materials.

What taxpayers should do next

The Education Freedom Tax Credit is scheduled to apply to qualified contributions beginning January 1, 2027. The IRS states that taxpayers, participating states, and Scholarship Granting Organizations may rely on the proposed regulations for qualifying contributions made after that date. 

Taxpayers considering a contribution should:

• Confirm whether the applicable state participates in the program.
• Verify that the organization is an eligible Scholarship Granting Organization.
• Make the contribution in cash using a traceable payment method.
• Obtain and retain the required acknowledgment.
• Review how a state tax benefit could interact with the federal credit.
• Consult a qualified tax professional before claiming the credit.

Because the detailed regulations are still proposed, taxpayers should watch for final IRS guidance, updated organization lists, forms, and filing instructions before preparing their 2027 returns.