The Education Freedom Tax Credit (EFTC) is a new federal income tax credit for certain cash donations to approved Scholarship Granting Organizations (SGOs). Those organizations then use the money to provide K-12 scholarships, expanding educational opportunity to eligible students.
The credit was created under the Working Families Tax Cuts (also known as the One Big Beautiful Bill Act, or OBBBA), signed into law by President Trump in 2025. In October 2026, the U.S. Department of the Treasury and the Internal Revenue Service released proposed regulations explaining how this new school choice program would work when it launches Jan. 1, 2027. Here’s what taxpayers need to know before the credit becomes available in 2027.
Note: The credit itself is already law; however, some of the details discussed below are based on proposed Treasury Department regulations and may change before the rules are finalized.
At a glance:
- The Education Freedom Tax Credit (Federal Scholarship Tax Credit) becomes available in 2027. This means it will be claimed on your 2027 return, which most people will file in 2028.
- Taxpayers can claim up to $1,700 for qualifying donations to approved scholarship organizations.
- Married couples filing jointly may qualify for up to $3,400 under proposed rules.
- Scholarship funds can be used to cover private school tuition and other qualifying K-12 education expenses.
- The credit is nonrefundable, and some program details are still being finalized.
What is the Education Freedom Tax Credit?
The Education Freedom Tax Credit is a new federal scholarship tax credit under Section 25F of the Internal Revenue Code.
In simple terms, it works like this:
- You donate cash to an approved scholarship organization.
- You may receive a federal tax credit for your donation (up to $1,700).
- The organization then uses donations to provide scholarships to eligible K-12 students.
The credit applies beginning in 2027. This new credit has multiple names — the IRS refers to it as the Federal Scholarship Tax Credit (FSTC), while the U.S. Department of the Treasury and U.S. Department of Education also commonly call it the Education Freedom Tax Credit. You may also hear it referred to as the School Choice Tax Credit or the Scholarship Granting Organization Tax Credit.
This tax credit scholarship program builds on earlier proposals such as the Educational Choice for Children Act, but it ultimately became law through the One Big Beautiful Bill Act in 2025.
How much is the Education Freedom Tax Credit?
The maximum credit amounts for 2027 are:
| Filing situation | Potential maximum credit |
|---|---|
| Individual taxpayer | $1,700 |
| Married couple filing jointly, if each spouse makes qualifying contributions | $3,400 |
Under the proposed regulations, the credit is based on qualifying cash contributions made during the tax year.
How does the Education Freedom Tax Credit work?
There are two separate groups involved when we talk about the EFTC rules:
- The taxpayer who donates to an approved SGO and claims the tax credit.
- The eligible students who apply to SGOs for scholarships.
To be clear, you do not claim the Education Freedom Tax Credit simply because you pay your own child’s private school tuition, academic tutoring costs, or other school expenses. To claim the credit, you must make a qualifying cash contribution to an approved SGO.
You also do not need to itemize deductions to claim the credit, and it is separate from the standard deduction.
EFTC example
Let’s say you donate $1,700 to a qualified SGO in 2027. If you otherwise qualify and do not receive a state tax credit for the donation that reduces your federal credit, you could receive a dollar-for-dollar federal tax credit of up to $1,700.
The SGO then uses qualifying contributions from donors to award K-12 scholarships to eligible students, meaning your $1,700 contribution does not necessarily go directly to one particular child or school.
Under the proposed regulations, married taxpayers filing jointly could potentially claim up to $3,400 if each spouse makes qualified contributions of $1,700.
What counts as a qualifying contribution?
The contribution must come directly from you as an individual and be made in cash to a qualified SGO.
For this purpose, “cash” simply means money paid by methods such as checks, electronic bank transfers, debit cards, or credit cards. Donations of property (like stocks, cryptocurrency, supplies, equipment, etc.) do not qualify for the credit.
A few other rules are worth noting:
- If the SGO gives you something in return, that value reduces your qualifying contribution. For example, if you contribute $1,700 but receive a $100 benefit in return, only $1,600 would count toward the credit.
- Business contributions do not pass through to owners for this credit. Under the proposed rules, a partner or S corporation shareholder generally cannot claim the Education Freedom Tax Credit based on their share of a contribution made by the partnership or S corporation. The qualifying contribution must be made by the individual taxpayer.
What is a Scholarship Granting Organization?
A Scholarship Granting Organization, or SGO, is essentially a nonprofit organization that collects qualifying donations and uses that money to provide scholarships to eligible students. Not all nonprofits qualify; generally, the SGO must be a Section 501(c)(3) public charity rather than a private foundation.
For the Education Freedom Tax Credit, SGOs are approved by participating states. It works like this:
- The state opts into the program.
- It identifies the organizations it wants to certify.
- The state then submits its list of qualified SGOs to the IRS.
That means an organization does not qualify for the federal credit just because it offers scholarships. It must be properly certified and included on the applicable approved list.
The IRS is expected to maintain a federal list that taxpayers can use to identify qualified SGOs. Under the proposed regulations, taxpayers can generally rely on an organization’s inclusion on the IRS list when determining whether a donation qualifies for the credit.
Because state participation matters, the available SGOs may differ from one state to another. Once the IRS publishes its Federal Scholarship Tax Credit resources and qualified SGO lists, it’s a good idea to check them before you donate to ensure the organization qualifies for the credit.
Who qualifies for the Education Freedom Tax Credit?
You must be a U.S. citizen or resident to claim the credit.
There is no household-income test that the donor must meet. In other words, your own income does not determine whether the student scholarship income limit applies to you as the donor.
A few other tax rules apply:
- State tax credits for the same gift reduce the amount eligible for the federal credit before the $1,700 cap applies.
- You cannot claim a federal charitable deduction for the portion of a contribution used to claim this credit.
You also don’t need to:
- Have a child in private school.
- Have a child receiving a scholarship.
- Use the scholarship yourself.
- Live in the same state as the SGO receiving your donation.
EFTC nonrefundable and carry-forward rules
The EFTC is nonrefundable. That means it can reduce your federal income tax liability to $0, but it cannot give you more money back than the tax you already owe.
For example, let’s say you otherwise qualify for a $1,700 credit in 2027 but only owe $1,000 in taxes available for the credit to offset. You would not receive the extra $700 as an additional tax refund.
However, Treasury guidance allows you to carry forward any unused credit for up to five years (subject to applicable rules). So, using the above example, you could claim the unused $700 credit on next year’s tax return.
Does my state need to participate for me to claim the EFTC?
A state must opt into the federal program before SGOs in that state can participate. However, you don’t necessarily have to live in a participating state to take advantage of the tax credit. The proposed regulations would allow you to contribute to a qualified SGO in another participating state regardless of your state of residence.
For example, if you live in State A and State A does not participate, you could potentially donate to a qualified SGO in participating State B and claim the federal credit. The SGO would then use its Section 25F scholarship funds for eligible students in State B.
As of Sept. 14, 2026, 30 states had made advance elections to participate in the Federal Scholarship Tax Credit in 2027. This list is subject to change, so before making a 2027 contribution, check IRS.gov for the latest participating-state information and the list of qualified SGOs (once available).
Who can receive an SGO scholarship?
Keep in mind that the rules for the person claiming the tax credit differ from the rules for the student receiving the scholarship.
Income limits for SGO scholarships
In general, the student must:
- Be eligible to enroll in a public elementary or secondary school.
- Live in a household whose income for the previous calendar year does not exceed 300% of the area’s median gross income, taking household size into account.
That may sound complicated, but area median gross income basically means the typical income level in the student’s geographic area. So, the income limit changes depending on where the student lives and how many people are in the household.
For example, the proposed regulations explain that if an area’s median gross income were $100,000, the maximum could be $300,000 for a four-person household after applying the program’s 300% limit. Different household sizes use different adjustments. The IRS expects to publish applicable income limits by geographic area and family size.
How student eligibility for SGO scholarships is verified
The proposed rules would also make it easier for some students to prove they qualify. That includes certain foster children, families participating in needs-based assistance programs, and some students receiving tutoring or special-needs services in lower-income areas. But these streamlined rules are still proposed and could change before the regulations are finalized.
Meeting the federal maximum does not guarantee a scholarship. Treasury estimates that about 95% of U.S. children live in households that meet student income limits, but awards depend on SGO funding, applications, and qualified expenses. An SGO may choose to focus on students with lower household incomes or have other scholarship priorities as long as it follows federal requirements.
What rules are still being finalized?
The Education Freedom Tax Credit/Federal Scholarship Tax Credit itself is already part of federal law, but certain rules are still being finalized.
In October 2026, the U.S. Department of the Treasury and the IRS proposed detailed rules addressing issues including:
- How student household income is calculated and verified
- Safe harbors that can make it easier for certain students to prove eligibility
- How SGOs qualify and operate
- How multistate SGOs can participate
- How scholarship funds can be paid or reimbursed
- How SGOs verify qualified education expenses
- How state and federal tax credits interact
- How unused tax credits are carried forward
- How states submit and certify their SGO lists
- Reporting, recordkeeping, and anti-fraud requirements
The regulations also propose a donor identification system, under which an SGO would provide the taxpayer with a unique donor number to use when claiming the credit. That system is designed so the SGO would not have to collect a donor’s taxpayer identification number (such as a Social Security number) simply to report the contribution.
The proposed rules would also require donors to substantiate the credit on Form 8525, Federal Scholarship Tax Credit (or a successor form) attached to Form 1040. The IRS has not released that form or its instructions yet.
Treasury and the IRS are accepting comments on the proposed regulations before considering final rules, but taxpayers, states, and SGOs may rely on the proposed regulations for qualifying contributions beginning Jan. 1, 2027.
Education Freedom Tax Credit FAQs
The bottom line
The Education Freedom Tax Credit (Federal Scholarship Tax Credit) gives taxpayers a new way to support K-12 scholarships starting in 2027. If you make a qualifying cash contribution to an approved Scholarship Granting Organization, you may be able to claim a federal tax credit of up to $1,700, or up to $3,400 for married couples filing jointly, under the proposed rules. Some of the program details are still being finalized, so it’s a good idea to check the latest IRS guidance before making a contribution.
When it’s time to file your 2027 return, TaxAct® can help you determine whether you qualify for the Education Freedom Tax Credit, calculate the amount you can claim, and walk you through the filing process.
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Citations
Internal Revenue Service. “The Trump administration advances the establishment of America’s first nationwide school choice program.” IRS Newsroom, 1 Oct. 2026.
Internal Revenue Service. “Federal Scholarship Tax Credit (FSTC).” IRS.gov, 16 Sept. 2026.
TaxAct. “Itemized Deductions vs. Above-the-Line Deductions.” TaxAct Blog.
TaxAct. “Should You Itemize or Take the Standard Deduction?.” TaxAct Blog.
Internal Revenue Service. “Exemption Requirements – 501(c)(3) Organizations.” IRS.gov.
TaxAct. “Tax Deduction for Charitable Contributions.” TaxAct Blog.
Department of the Treasury, Internal Revenue Service. “Federal Scholarship Tax Credit.” Federal Register, 2 Oct. 2026 (proposed regulations REG-117199-25).
TaxAct. “What Is Form 1040?.” TaxAct Blog.
