IRS issues rules for new scholarship donation tax credit
The IRS issued temporary and proposed rules on Oct. 2, 2026, for a new federal tax break tied to donations to groups that award scholarships. Donors could claim up to $1,700, and the program is scheduled to start in 2027, with scholarships going to public or private school students. The regulations define 26 terms, including an income threshold that affects which families qualify.
The IRS issued temporary and proposed rules on Oct. 2, 2026, for the Federal Scholarship Tax Credit, also called the Education Freedom Tax Credit. The program starts Jan. 1, 2027; the rules apply in 2027 until final rules arrive in 2028. Donors may claim a nonrefundable dollar-for-dollar credit up to $1,700 for gifts to authorized scholarship-granting organizations, which award scholarships to public or private school students for educational expenses.
The rules define 26 terms. Eligibility uses area median gross income, with families below 300% qualifying; the IRS estimated about 96% of students in participating states would be eligible. Other provisions bar self-dealing by excluding major SGO contributors, officers, directors, recipient selectors, and their family members from scholarships.
The credit could affect families seeking help with school expenses, donors deciding whether to give through scholarship organizations, and states weighing participation. Because eligibility extends to many middle-income households, the program may broaden the pool of potential scholarship recipients while also raising questions about how organizations select students and prevent conflicts. Schools and SGOs may face new administrative and compliance choices, and the rules’ reach could shape how quickly the credit is used once it begins.