Starting January 1, 2027, individuals can earn a federal tax credit for donating to organizations that fund K–12 scholarships. The §25F Federal Scholarship Tax Credit, also known as the "Education Freedom Tax Credit," was created by the One Big Beautiful Bill Act. On October 1, 2026, Treasury and the IRS released proposed regulations and companion temporary regulations explaining how the program will work. Here’s what individuals and scholarship organizations should know.

How the Credit Works

Individuals who donate cash to a qualifying scholarship granting organization (SGO) can reduce their federal income tax. An SGO is a tax-exempt public charity (private foundations do not qualify) that uses donations to award scholarships to elementary and secondary school students. Scholarship gifts cannot be earmarked for a particular student, such as your own child or grandchild. You choose the SGO, not the student; the SGO selects recipients. The credit comes with many details, including:

• States must opt in. Donations qualify only if the SGO is located in a state that has elected to participate and has placed the SGO on its approved list. According to the IRS, 30 states had made advance elections to participate for 2027 as of September 14, 2026.
• Scholarships cover a wide range of costs. Qualifying expenses include tuition, fees, tutoring, special-needs services, books, supplies, uniforms, transportation, and computers for students attending a public, private, or religious school. The IRS will issue separate guidance on exactly which expenses qualify. Scholarships pay an individual eligible student’s expenses; they are not grants for a school’s or district’s general programs.
• Student eligibility. Scholarships go to students from households earning no more than 300% of the area median gross income. Students must also live in the state where the SGO is listed, with exceptions for military families and families living on Indian lands. SGOs must verify student eligibility.

For Individuals: Getting the Tax Benefit

A tax credit reduces your tax bill dollar for dollar, which makes it more valuable than a deduction of the same amount. Individuals may claim up to $1,700 per year, $3,400 for married couples filing jointly provided that each spouse contributes. The credit is nonrefundable, meaning it can reduce your tax to zero but will not produce a refund on its own. However, unused credit can be carried forward for up to five years.

To make sure your gift qualifies:

• Check the IRS SGO list before you give. The IRS will publish a list of approved SGOs on irs.gov. You can give to an SGO in any participating state, not just your own. 
• Give cash. Checks, credit or debit cards, electronic transfers, and after-tax payroll deductions all count. Stock, other property, and digital assets (including cryptocurrency) do not. Contributions must be made by you, not through a partnership or S corporation.
• Designate the gift at the time you make it. You must tell the SGO when you donate that the gift is a qualified Section 25F contribution. If you receive anything in return, such as event tickets, its value reduces the creditable amount. 
• Keep your acknowledgement. By January 31 of the following year, the SGO will send you a statement with a unique donor number. You will report that number on Form 8525 when you claim the credit. 
• Coordinate with other tax benefits. A gift that generates the federal credit generally cannot also be deducted as a charitable contribution. If your state offers its own scholarship credit, the federal credit is reduced by any state credit you receive for the same qualified contribution. Under the proposed regulations, that reduction is applied before the $1,700 limit. 

Scholarships funded through an SGO are generally excluded from the recipient’s federal gross income under §139K. The donor’s annual credit limit does not cap the amount of an eligible student’s scholarship, although an award may not exceed the qualified education expenses it is intended to cover.

For Scholarship Granting Organizations

Organizations that want to receive creditable donations in 2027 should act soon. The key requirements include:

• Register with the IRS. Every SGO must register on a new IRS SGO portal, ideally before it appears on any state list. Registration provides the format for generating unique donor numbers, so SGOs will not need to collect donors' Social Security numbers.
• Get on a state list. Your state must certify that your organization meets the requirements. An SGO is considered "located in" a state if it is authorized to do business there and complies with the state's charity laws, so a physical office is not required. States may not impose stricter rules than federal law, such as limiting which schools students may attend or which education expenses are covered. An organization may still choose to narrow its own mission, for example to particular schools or subjects. Newly formed organizations and those with pending exemption applications may still be listed under transition rules.
• Keep funds separate. Qualified contributions must be held in a segregated account used only for those contributions and their earnings.
• Serve at least 10 students. An SGO must provide scholarships to 10 or more students who do not all attend the same school. No gift can be set aside for a particular student.
• Spend on scholarships. An SGO must spend at least 90% of its income on scholarships for eligible students, generally by the end of the taxable year after the year the income is received. The proposed rules define income as total gross receipts from all sources, which makes the test hard to meet for organizations with significant non-scholarship activities. Unless the safe harbor below applies, administration, compliance, and audit costs must fit within the remaining 10 percent of income, so organizations should model those costs before registering
• Consider the safe harbor. Under the proposed rules, a single-state SGO whose activities are at least 85% scholarship-granting may apply the 90% spending test and other operational requirements to its Section 25F account alone, funding administration from other sources. Multistate SGOs must meet the 85% threshold and keep a separate account for each state. How the 85% is measured remains open.
• Meet the reporting deadlines. You must send donor acknowledgements by January 31 and report each donor's contributions to the IRS by February 28 of the following year. Under the proposed rules, SGOs must also undergo an annual independent financial and programmatic audit and give the results to each state that lists them and must file an annual certification with the IRS. For the audit, organizations with more than $500,000 in total receipts need a qualified independent third party; smaller organizations may use a committee of independent persons unrelated to management.

Since the operational requirements may be difficult to reach for existing charities, a separate SGO may need to be established if the safe harbor cannot be met. SGOs that fail to comply can be removed from state lists or the IRS list. 

Key Dates

• January 1, 2027: Deadline for states to submit advance elections for 2027; creditable contributions may begin.
• February 15, 2027: Deadline for states to submit their certified 2027 SGO lists.
• January 31 and February 28, 2028: First deadlines for SGO donor acknowledgements and IRS reporting.

For years after 2027, state participation operates on an earlier annual cycle. A state may make an advance election between January 2 and September 30 of the preceding year and then submit its SGO list between October 1 and January 1, or it may simply elect when it submits its list in that window. A state participating for the first time must make an advance election under procedures the IRS has yet to announce. 

What's Still Unsettled

These rules are proposed and temporary, and several details are left to future IRS guidance. Taxpayers, SGOs, and states may rely on the proposed rules for contributions made on or after January 1, 2027, but the final rules could change. Because 2027 state lists may not be final until mid-February, donors giving in early 2027 should confirm an SGO's status before contributing.

How RubinBrown Can Help

Whether you are an individual planning your giving or an organization weighing whether to become an SGO, our team can help you evaluate the opportunity, plan for compliance, and perform the required annual independent audit. Contact your RubinBrown advisor to learn more.

Published: 10/09/2026

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