IRS Unveils Proposed Rules for Federal Scholarship Tax Credit

The Treasury Department and the IRS released proposed regulations for the Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit. The credit stems from legislation signed in July 2025 and applies to contributions funding K-12 scholarships.

Under the proposal, eligible individuals can claim up to $1,700 annually for cash donations made to approved Scholarship Granting Organizations. Spouses filing jointly are treated as separate taxpayers for the individual limit, allowing a combined maximum of $3,400 if both make distinct contributions. Unused credit amounts are permitted to carry forward for up to five years.

Donations must go directly to eligible organizations rather than individual students or schools, and donors cannot specify a particular student recipient. Participating states will identify eligible organizations, and student household incomes cannot exceed 300% of the area median gross income from the prior year.

Alongside the proposed rules, authorities issued temporary regulations to establish procedures for states and organizations preparing for a planned January 2027 rollout. Officials noted that immediate implementation was necessary to give states and organizations adequate time for certification and eligibility determinations.