On October 1, the U.S. Department of the Treasury and the IRS issued proposed and temporary regulations implementing the new Federal Scholarship Tax Credit (also referred to as the Education Freedom Tax Credit under Internal Revenue Code Section 25F). The nationwide program goes into effect on January 1, 2027.It is a federal tax credit program that allows individual taxpayers to make private cash donations to approved Scholarship Granting Organizations (SGOs) in exchange for a dollar-for-dollar nonrefundable federal income tax credit. SGOs turn these contributed funds into educational scholarships for eligible students in K-12.

Individual tax filers can claim a dollar-for-dollar nonrefundable tax credit on their federal tax bill of up to $1,700 per tax year. Married taxpayers filing jointly can claim a combined credit of up to $3,400 per year. The credit is claimed in tax years after 2026. You give first; the credit reduces your federal tax bill when you file.

Many charitable donations qualify for a tax deduction. These tax deductions reduce your taxable income, which means the actual savings are a fraction of what you gave. For example, if you’re in the 24% tax bracket and claim a $1,700 deduction, you save about $408. That’s it.A tax credit, on the other hand, reduces your actual tax bill, dollar for dollar. Rather than giving your full tax payment to the IRS, you’re redirecting a portion of it to a cause you care about. For example, if you donate $1,700 to a qualified scholarship granting organization (SGO) and owe $2,000 in federal taxes, you now owe $300. Your tax liability decreases by $1,700, not $408.

If your credit is more than you owe in federal taxes for the year, the unused amount can generally carry forward for up to five years.