The Federal Tax Credit Rules Are Here: Here’s What We Know

The wait is over. The U.S. Department of the Treasury has released regulations for the Federal Tax Credit for Scholarships (FTCS), giving states, scholarship granting organizations (SGOs), donors, and families important new details about how the policy will work when it launches in 2027.  

And there’s a lot to unpack.  

The FTCS, also known as the Education Freedom Tax Credit, was signed into law on July 4, 2025. Beginning January 1, 2027, taxpayers can make qualifying contributions to SGOs, which will use those contributions to provide scholarships that help eligible students access educational opportunities. 

But the law left some important questions about how all of this will work in practice, and tasked Treasury with clarifying.  

First, the U.S. Dept of Treasury Makes the Rules for FTCS Scholarships. 

The FTCS is part of federal tax law, which means Congress gave the U.S. Department of the Treasury authority to develop regulations necessary to put the law into practice.  

Treasury has authority to interpret language in the FSTC statute that is not clear, or that needs consideration for how to make it work, but Treasury does not have authority to create new law or change the meaning of the law. 

Getting Started: Where’s The Money? 

On January 1, 2027, SGOs in each of the 30 states that have so far elected to participate in the FTCS will be able to accept donations that qualify for the new federal tax credit.  

Individuals can donate up to $1,700 and claim a dollar-for-dollar federal tax credit for that contribution. Married couples filing jointly can donate up to $3,400 and claim the credit. This was an important clarification in the new Treasury rules: Each spouse can qualify for the $1,700 credit.  

Want to give more? You can! Treasury also affirmed that contributions above the applicable $1,700 or $3,400 (if filing jointly) credit limit may qualify for a federal charitable tax deduction.  

Importantly, unlike students who must live in a participating state to access a scholarship, donors throughout the U.S. may contribute to any qualified SGO, regardless in which state the donor or SGO is located.  

Those donations will provide the funding SGOs use to award scholarships to eligible students.  

What about states with their own state tax credit scholarship program? Can a donor get a state and federal tax credit? 

Yes! The donor’s contribution will be reduced by the amount the donor claims for a state tax credit, and the remainder will be available for the FTSC tax credit. Donors may designate their contributions as intended to support FTSC scholarships. Once designated, the decision is irrevocable, and the donation will be deposited into a segregated account specifically for FTSC scholarship funding. A donor cannot receive both a state and federal tax credit for the same dollar.  

How Can Families Access the Scholarships?  

Before families can receive scholarships, they’ll need to know which SGOs are operating in their state. It is highly likely that families will hear about SGOs when they advertise, and for those SGOs serving particular schools, the schools will also have contact information. 

And there’s more – Under the FTCS, participating states are responsible for submitting a list of qualifying SGOs to the U.S. Department of the Treasury. Also, each SGO must register through a separate SGO IRS portal, and this information will be publicly available if the SGO agrees. Check back with EdChoice for information updates on this. 

It’s reasonable to expect money to be available by summer of 2027, or at least by the beginning of the 2027-2028 school year. Funds may be available sooner from some SGOs. Treasury expects that within the first three years, donations will be available to fund 2.2 million scholarships. 

Can ALL Students Get Scholarship Funding? 

Not quite, but Treasury estimates that approximately 96% of students in participating states will be eligible.  

Students from families earning less than 300% of the average median gross income where they live are eligible for scholarships, so long as they reside in a state that has opted to participate in the tax credit.  

What does that mean? Income limits vary based on where a family lives. For example: 

• In Oglala Lakota, South Dakota, the average median gross income is $35,700. Multiplied by 300%, it means families earning up to $107,100 may qualify. 

• In Santa Clara, California, an area median income of $205,500 means families earning up to $616,500 may qualify.  

What’s new in the Treasury rules? The income limit will also adjust based on family size, increasing as the number of children in a family increases. Eligibility is broad, but the specific income limit will depend on where a family lives and the size of the family.  

Additionally, Treasury affirmed in the rules that children in foster care are exempt from the income limit requirements.  

Homeschool and Microschool Students: Eligibility Depends on the State 

Here’s where eligibility gets more complicated. 

 For 2027, Treasury says that to spend scholarship funds on eligible education expenses, students must be enrolled in a public, private, or religious school, based on how each state defines a “school.” That creates a problem for some homeschool and microschool students because many states intentionally do not define those learning environments as schools.  

Treasury interprets the law in a way that does not exclude homeschool and microschool students but blocks their ability to use scholarship funding for qualified expenses unless enrolled in a school – as their state of residence defines a school. This means that in 28 states, where the definition of a school does not include homeschools or microschools, those students cannot receive scholarship funding.  

Homeschools and microschools often have good reasons for not wanting to be legally defined as schools. Under Treasury’s interpretation, however, that distinction can also prevent their students from accessing FTCS scholarship funds. 

The good news is that Treasury recognizes that many of us disagree with their conclusion on this issue and has included the issue for public comment that is open now.  

Also,  children of a member of the Armed Forces of the United States and children of an individual residing on Indian Lands are not subject to the state residency requirement. This is part of the proposed rules and Treasury indicates we can rely on this guidance for 2027. 

Which SGOs Can Participate? 

The new rules make one thing clear: If an SGO meets the requirements, a state must include it.  

States are required to submit a list of all SGOs in the state that meet the federal requirements. They cannot pick favorites or limit participation to certain numbers or types of qualifying SGOs. 

To qualify, an SGO must be a charitable nonprofit, meet its state’s requirements for soliciting charitable donations, and comply with other rules that apply to nonprofits doing business in the state. 

The takeaway: States affirm which organizations meet the requirements, but they don’t get to choose among those that qualify. States also have no authority to add requirements for SGOs that are more restrictive than federal requirements. If states do not comply, the IRS has discretion to institute federal review to require states to comply.  

Do All SGOs Give Scholarships for the Same Educational Resources? 

No. 

Treasury has confirmed that SGOs will decide whether to serve only students attending public schools, or private schools, or religious schools. Another SGO may wish to provide scholarship funding to any student for tutoring or special needs services and therapies. SGOs will also decide whether to offer a flat amount for scholarships, or to award scholarships as the needs of the student demands. For example, some services for children with disabilities can be quite expensive, whereas funding for books may be important, but not costly. 

The Rules Are Final for 2027. What About 2028?  

The 2027 rules provide all information and direction necessary for every state to participate and every SGO to begin operating on January 1, 2027. The interim final rules provide detailed instruction on exactly how a state can elect to participate, along with instructions on how to interact with SGOs. There are also clear, highly detailed instructions for SGOs to interact with Treasury. The IRS will provide a portal for each. This is a simple, easy-to –use process, well-defined by Treasury.  

 Treasury also released proposed rules for activities more related to implementation, such as qualified expenses, income verification, etc. We can all rely on these proposed rules to operate in 2027, and Treasury has also allowed additional time for stakeholders to comment on anything they submitted today. They are listening to us  

This is a time for all to participate in constructing the rules for these tax credit scholarships, as a large community of people interested in increasing opportunities for learning and creating conditions wherein children can thrive and become successful adults. It is imperative that in our zeal we do not support anything that could hamper the freedom of parents to use these scholarships to help their children learn. The beauty of the FTCS rests in its flexibility, which allows innovators in education to offer new ways of learning that can be supported through scholarships to students who would benefit. 

Our U.S. Dept of Treasury has made a truly good faith effort to create this opportunity for a great new tax credit to help us come together as a nation, and work together, for the best interests of those who will be the next generations of leaders in America.