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.
In remarks delivered on June 9, 2026, Kevin Salinger, Deputy Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, announced that Treasury and the IRS expect to issue proposed regulations governing the Education Freedom Tax Credit no later than the end of September 2026.
Perhaps most importantly, Treasury stated that states, Scholarship Granting Organizations, taxpayers, and other stakeholders will be permitted to rely on those proposed regulations for the 2027 tax year. While the proposed regulations remain subject to legal review and have not yet been formally released, Treasury indicated that the rules are expected to be consistent with the positions outlined in Salinger’s remarks.
That early roadmap matters. It gives organizations time to prepare systems, policies, reporting processes, and scholarship programs before the Education Freedom Tax Credit becomes available for contributions made on or after January 1, 2027.
Why the Proposed Regulations Matter
The ability to rely on proposed regulations is significant. It means states, SGOs, donors, schools, and tax professionals will not necessarily have to wait for final regulations before moving forward with implementation and compliance planning.
Once the proposed regulations are issued, stakeholders can begin developing administrative procedures, scholarship programs, reporting systems, and operational frameworks based on Treasury’s published guidance for the 2027 tax year.
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 forthcoming 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
Although Treasury has not yet released the proposed regulations, Salinger’s remarks provide valuable insight into the framework Treasury expects to adopt.
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
Treasury expects to adopt a broad definition of school consistent with Section 530. The anticipated regulations would recognize public, private, and religious K–12 schools. Homeschools would qualify if treated as schools under applicable state law, and schools operated by federally recognized tribes or tribal organizations would also be eligible.
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 Portal Under Consideration
Treasury also announced plans to develop an IRS portal to support SGO administration and reporting. Implementation may occur in phases, but the goal is to create a centralized platform that simplifies interactions between SGOs and the IRS over time.
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
The Education Freedom Tax Credit represents one of the most significant federal school choice initiatives enacted in recent years. The next major milestone will be the formal release of Treasury and IRS proposed regulations.
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.
By the End of September 2026: Proposed Regulations Expected
Treasury and the IRS expect to issue proposed regulations no later than the end of September 2026.
Tax Year 2027: Reliance on Proposed Regulations
States, SGOs, and taxpayers are expected to be able to rely on the proposed regulations for the 2027 tax year.
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 is provided for general informational purposes only and should not be treated as tax, legal, or financial advice. Donors, SGOs, schools, and families should consult qualified advisors and review final Treasury and IRS guidance as it becomes available.
