Treasury Previews Regulations for the Education Freedom Tax Credit
The U.S. Department of the Treasury has offered its first substantive preview of how it intends to implement the new federal scholarship tax credit under Section 25F of the Internal Revenue Code.
Treasury and the IRS issued proposed Section 25F regulations on October 1, 2026, together with companion temporary regulations establishing key implementation procedures.
The temporary regulations address matters including State elections and SGO lists, SGO registration through the IRS portal, unique donor numbers, donor acknowledgments and qualified-contribution reporting. The broader proposed regulations address taxpayers, SGO operations, student eligibility, scholarship administration and other program requirements.
Taxpayers, States and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027, provided the applicable portions are followed consistently.
Why the Proposed Regulations Matter
The proposed regulations have now been issued, giving States, SGOs, donors, schools and tax professionals a much more detailed framework for preparing for the 2027 program.
Because Treasury and the IRS permit reliance on the proposed regulations for qualified contributions beginning January 1, 2027, stakeholders can use the applicable rules for implementation and compliance planning while the rulemaking process continues.
Given the ambitious timeline for launching the Education Freedom Tax Credit, this early regulatory certainty may prove critical to the program’s success.
What Is the Education Freedom Tax Credit?
Section 25F, known as the Education Freedom Tax Credit, provides an individual federal income tax credit of up to $1,700 for qualified cash contributions made to approved Scholarship Granting Organizations that fund K–12 scholarships for eligible students.
Unlike a deduction, a tax credit reduces federal income tax owed dollar-for-dollar. If the full credit cannot be used in the year of the contribution, the unused portion may be carried forward for up to five years.
A Dollar-for-Dollar Federal Tax Credit
Beginning in 2027, qualified taxpayers may be able to claim a federal credit for contributions to eligible SGOs, subject to statutory requirements and applicable Treasury and IRS guidance.
For Donors
Support K–12 scholarships while potentially reducing federal income tax owed through a dollar-for-dollar credit.
For Families
Scholarships may help eligible students access tuition, tutoring, support services, and other qualified education expenses.
For SGOs
Scholarship Granting Organizations will play the central role in receiving qualified contributions and awarding scholarships.
Key Takeaways from Treasury’s Preview
Treasury and the IRS have now released the proposed regulations, many of which build on the framework previewed in Salinger’s June remarks.
Safe Harbor for the 90% Scholarship Requirement
Section 25F requires eligible SGOs to spend at least 90% of their income on scholarships for eligible students. Treasury expects to generally measure this requirement using an organization’s total receipts without reduction for expenses. However, organizations primarily engaged in scholarship-granting activities may be able to use a safe harbor based on funds held in a segregated Section 25F account, including qualified contributions and earnings.
What “Located In” a Participating State Means
Treasury expects to define an SGO as located in a state if it is authorized to do business there and complies with generally applicable state charitable organization requirements. At the same time, Treasury indicated that states may not impose SGO-specific requirements that are more restrictive than Section 25F itself.
A Path Forward for Multistate SGOs
Treasury signaled support for multistate scholarship organizations. Under the anticipated rules, an SGO may appear on multiple participating-state lists if it is located in each participating state and maintains a separate Section 25F account for that state.
Broad Definition of Eligible Schools
The proposed regulations define “school” by reference to Internal Revenue Code Section 530(b)(3)(B), meaning a school providing elementary or secondary education from kindergarten through grade 12, as determined under applicable state law. Whether a particular educational arrangement qualifies therefore depends in part on its treatment under state law and applicable IRS guidance.
Student Eligibility Verification
SGOs are expected to be able to rely on traditional income documentation, including tax returns, IRS transcripts, Forms W-2, pay records, crediting agencies, or commercial data sources. Treasury also expects to permit categorical eligibility based on qualifying assistance programs, and foster children would satisfy the income requirement without separate income verification.
Fraud Prevention and Oversight
SGOs generally would be required to obtain annual financial and programmatic audits conducted by qualified independent reviewers. Smaller organizations may be eligible for a streamlined review process conducted by an independent internal committee unrelated to management.
Donor Reporting Without Collecting SSNs
Treasury expects SGOs to issue annual contribution acknowledgments that include a unique donor identification number generated under an IRS-provided methodology. Taxpayers claiming the credit would report that identifier on their federal tax returns, helping the IRS match credits without requiring SGOs to collect donor Social Security numbers.
IRS SGO Portal Required Under Temporary Regulations
The temporary regulations require an organization planning to solicit Section 25F qualified contributions to register electronically through the IRS SGO portal. Registration allows an organization to obtain the instructions needed to create unique donor numbers, authorize publication of identifying information on the IRS SGO list and report qualified-contribution information.
What This Means for SGOs, Donors, and Schools
Treasury’s preview suggests that the federal government is trying to balance two goals: making the Education Freedom Tax Credit workable across participating states while maintaining safeguards around eligibility, reporting, audits, scholarship use, and fraud prevention.
For SGOs, the preview points toward the need for clear accounting systems, segregated state-specific accounts, documented eligibility verification, written scholarship procedures, and strong audit readiness.
For donors, the preview offers an early look at how contribution acknowledgments may work and how the IRS may verify credit claims without SGOs collecting Social Security numbers.
For schools and families, the broad definition of eligible schools and the expected future Section 530 guidance may help clarify how scholarships can support tuition, academic tutoring, special needs services, and other qualified education-related expenses.
Looking Ahead: The Road to 2027
With the proposed and temporary regulations now issued, the next major implementation steps include State submission and certification of SGO lists, SGO registration through the IRS portal, completion of required contribution and reporting systems, and any additional IRS forms and implementation guidance needed for the January 1, 2027 launch.
June 2026: Treasury Preview Released
Treasury published its first substantive preview of forthcoming Section 25F guidance, including Kevin Salinger’s remarks on key implementation issues.
October 1, 2026: Proposed and Temporary Regulations Issued
Treasury and the IRS released proposed Section 25F regulations and companion temporary regulations establishing key procedures for the program’s 2027 launch.
Tax Year 2027: Reliance on Proposed Regulations
Taxpayers, States and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027, provided the applicable portions are followed consistently.
January 1, 2027: Credit Becomes Available
Taxpayers can begin claiming the Education Freedom Tax Credit for qualified contributions made on or after January 1, 2027, subject to applicable requirements.
Stay Informed as Section 25F Guidance Develops
Friends of Education is preparing to help donors, families, schools, and scholarship partners understand the federal scholarship tax credit program and the opportunities it may create for students across the nation.
Note: This article was originally published in June 2026 before Treasury and the IRS released the October 2026 proposed and temporary regulations. It is provided for general informational purposes only and should not be treated as tax, legal or financial advice. Donors, SGOs, schools and families should review current Treasury and IRS guidance and consult qualified advisers regarding their specific circumstances.
