Education Freedom Tax Credit 2027 — The $1,700 Federal Scholarship Tax Credit (§25F) Explained
Starting January 1, 2027, a new federal tax credit of up to $1,700 per person ($3,400 for a married couple filing jointly, under proposed IRS rules) pays you back dollar for dollar for cash gifts to K-12 scholarship granting organizations in participating states. Which states are in, how the credit is figured, the state credit and charitable deduction rules, Form 8525, and what is still proposed.
By Greg, Editor at Finance Maxx. Published · Updated
A brand-new federal tax credit starts on January 1, 2027. Give cash to a qualifying K-12 scholarship granting organization (SGO) and you can cut your federal income tax dollar for dollar, up to $1,700 a year. Under proposed IRS rules, a married couple filing jointly could get up to $3,400. Officially it’s the Federal Scholarship Tax Credit under IRC §25F. Most people call it the Education Freedom Tax Credit.
Treasury and the IRS released proposed regulations on October 1, 2026 (IR-2026-117), along with temporary regulations for states and SGOs. Several details below are proposed, not final. They’re marked as such.
Official sources: IRS news release IR-2026-117 (Oct. 1, 2026), the IRS Federal Scholarship Tax Credit (FSTC) page, the proposed regulations (REG-117199-25) and temporary regulations (T.D. 10057) in the Federal Register (Oct. 2, 2026), and the Treasury press release.
The short version
| Question | Short answer |
|---|---|
| What is it? | A nonrefundable federal tax credit for cash gifts to K-12 scholarship granting organizations |
| How much? | Up to $1,700 per person per year. Up to $3,400 on a joint return under the proposed rules |
| Starts | Contributions made on or after Jan. 1, 2027. Nothing given in 2026 counts |
| Where? | SGOs in states that opt in. 30 states had opted in as of Sept. 14, 2026 |
| Live outside those states? | You can still give to an SGO in a participating state, per the IRS |
| Claimed on | Your 2027 return (filed in 2028), on new Form 8525 |
| Also a charity deduction? | No for the credited part. Any extra may be deductible if you itemize |
| More than your tax? | Not refunded. Unused credit carries forward up to 5 years |
| Status of the rules | Proposed regs, comments due Dec. 1, 2026. Hearing set for Dec. 15, 2026 |
How the credit works
The law, added by the 2025 tax act (OBBBA §70411), gives an individual who is a U.S. citizen or resident a credit equal to their qualified contributions for the year, with two limits:
- Reduced by any state tax credit you’re allowed for the same qualified contributions.
- Capped at $1,700 per taxpayer per year.
Under the proposed regulations (§1.25F-2), the math runs in this order:
- Add up your qualified contributions for the year.
- Subtract any state credits allowed for those contributions.
- Your credit is the lesser of that result or $1,700.
Then any carryforward from earlier years is added on.
It’s a credit, not a deduction. A $1,700 credit cuts your federal income tax by $1,700 whether or not you itemize. It’s nonrefundable, so it can only bring your income tax down to zero, after certain other personal credits such as the child tax credit and education credits.
What counts as a “qualified contribution” (proposed)
- Cash only. The proposed rules define cash as currency, check, money order, electronic transfer (including credit or debit card), after-tax payroll deduction, or similar, in U.S. dollars. Digital assets don’t count. Neither do stock or property.
- You must designate it. At the time you give, you’d tell the SGO the gift is meant as a qualified contribution, so it goes into the SGO’s separate §25F account.
- Net of any benefit. If the SGO gives you goods or services in return, their value is subtracted.
- Made by an individual. The proposed rules don’t allow the credit for contributions that flow through a partnership or S corporation.
Which states are in (as of Sept. 14, 2026)
States have to opt in, and each participating state has to send the IRS a list of qualifying SGOs. The IRS lists these 30 states as having made an advance election for 2027:
Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Dakota, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wyoming.
Still pending:
| Step | Deadline (2027 only) |
|---|---|
| State files advance election (Form 15714) | On or before Jan. 1, 2027 |
| State submits its SGO list | On or before Feb. 15, 2027 |
| If a state misses the SGO list | No organization in that state qualifies for 2027 |
The IRS says it will publish an IRS SGO list on IRS.gov. Under the proposed rules, you can generally rely on an organization being on that list (and not marked removed) when you give. The list of states above can still grow or shrink, so check the IRS FSTC page before you give.
You don’t have to live in a participating state. The IRS says taxpayers “may contribute to an eligible SGO regardless of their state of residence.” A donor in a non-participating state can give to an SGO on a participating state’s list. Scholarships, though, go only to eligible students in participating states.
Married couples: $1,700 or $3,400?
The statute says the credit “shall not exceed $1,700” for “any taxpayer.” Many commenters asked Treasury to treat each spouse on a joint return as a separate taxpayer, and the proposed regulations agree. Married couples filing jointly can potentially claim up to $3,400, “provided that each spouse has made qualified contributions of up to $1,700.”
Two things to keep in mind:
- This is Treasury’s proposed interpretation. It could change in the final rules.
- The wording ties each $1,700 to each spouse’s own contributions. Final Form 8525 instructions should spell out how each spouse’s gifts are documented.
Stacking with a state scholarship credit
Many states already have their own scholarship tax credits. The federal credit is reduced by any state credit for the same qualified contributions. The proposed rules handle this in the taxpayer’s favor in two ways:
- The state credit comes off before the $1,700 cap, not after.
- A state credit is treated as coming first from the part of your gift you didn’t designate as a federal qualified contribution.
The IRS’s own example (proposed regs): a taxpayer in a state with a 100% credit up to $2,000 gives $5,000 and designates $1,700 as a qualified contribution. The other $3,300 supports the $2,000 state credit, and the $1,700 supports a $1,700 federal credit. That’s a $3,700 total tax benefit.
A state deduction (as opposed to a state credit) generally doesn’t reduce the federal credit under the proposed rules.
No double dip with the charitable deduction
Section 25F(e) says a contribution you take the credit for can’t also be deducted as a charitable contribution. Under the proposed rules, any part of the gift you don’t use for the credit may still be deductible under the normal charitable rules (for example, if you itemize).
Illustrative examples
These are made-up scenarios applying the rules above. They are not IRS figures, and they assume the SGO is on the IRS SGO list and you have enough federal income tax to use the credit unless noted.
| Illustrative situation | How the rules apply |
|---|---|
| Single filer gives $1,000 cash in 2027, no state credit | $1,000 federal credit. That $1,000 isn’t also a charitable deduction |
| Single filer gives $2,500, no state credit | Credit capped at $1,700. The other $800 may be deductible if itemizing |
| Married filing jointly, each spouse gives $1,700 | Up to $3,400 on the joint return (proposed reading) |
| Single filer, $1,700 credit but only $600 of income tax after other credits | $600 used in 2027. $1,100 carries forward up to 5 years |
| Donor gives in December 2026 | No credit. Contributions must be made on or after Jan. 1, 2027 |
| Donor gives appreciated stock | No credit under the proposed rules. Cash only |
Paperwork: donor numbers and Form 8525 (proposed)
To protect donors’ privacy, the proposed rules don’t require SGOs to collect your Social Security number. Instead:
- Each SGO gives you a unique donor number in a written acknowledgment by January 31 of the year after you give.
- If you give to more than one SGO, you get a different number from each.
- You claim the credit on Form 8525, Federal Scholarship Tax Credit, reporting each SGO’s donor number. Missing donor numbers can cost you the credit unless you can otherwise substantiate it.
Form 8525 and its instructions haven’t been published yet. Expect them before the 2028 filing season, when 2027 returns are filed.
Who the scholarships help
SGOs must be 501(c)(3) public charities (not private foundations), keep §25F money in separate accounts, spend at least 90% of income on scholarships, serve 10 or more students at more than one school, and not earmark gifts for a particular student.
Scholarships can pay qualified elementary and secondary education expenses (the Coverdell ESA definition). The IRS lists private-school tuition, tutoring, special-needs services, books, supplies, computers, and other equipment.
An eligible student must be eligible to enroll in a public K-12 school and live in a household with income no more than 300% of area median gross income, adjusted for family size. In the proposed regs’ example, with a $100,000 area median, a family of four qualifies at up to $300,000. Scholarships received after Dec. 31, 2026 are excluded from the family’s income (new §139K).
Treasury and the IRS estimate that, under the proposed rules and safe harbors, about 96% of children in participating states would be eligible.
What’s final vs. still proposed
| Item | Status |
|---|---|
| $1,700 cap, cash gifts, SGO rules, 5-year carryforward, no double charitable deduction | In the statute (§25F) |
| Start for 2027 contributions | In the statute |
| $3,400 for joint filers | Proposed regulation |
| Cash definition (no digital assets), designation, donor numbers, Form 8525 reporting | Proposed regulations |
| State credit ordering rule (taxpayer-favorable) | Proposed regulation |
| State election and SGO list deadlines, IRS SGO list | Temporary regulations (effective Dec. 1, 2026) |
| List of participating states | Not final until states submit SGO lists (due Feb. 15, 2027) |
The IRS says taxpayers, states, and SGOs may rely on the proposed regulations for qualified contributions starting Jan. 1, 2027.
Comment period and hearing (pending): written comments on REG-117199-25 are due by December 1, 2026 via regulations.gov. A public hearing is scheduled for Tuesday, December 15, 2026, at 10 a.m. ET. Outlines from speakers are also due Dec. 1. If none arrive, the hearing is cancelled.
What to do now
- Don’t give for the credit in 2026. It only counts for cash contributions made on or after Jan. 1, 2027.
- Watch the IRS FSTC page for the final state list and the IRS SGO list. Give only to an organization on that list.
- When you give in 2027, use cash (check, card, transfer), designate it as a qualified contribution, and keep the acknowledgment and donor number.
- Married? Under the proposed rules each spouse needs their own qualified contributions to reach $3,400.
- Already get a state scholarship credit? Split your gift so the state credit and the $1,700 federal piece don’t overlap (see the stacking example above).
- Sketch your 2027 federal tax in the federal tax calculator. The credit only helps up to the income tax you owe. The calculator doesn’t model §25F, so subtract the credit yourself as a rough add-on.
What this does not do
- It’s not personalized tax advice and doesn’t recommend any particular SGO or school.
- It doesn’t cover each state’s own scholarship credit rules.
- It reflects proposed and temporary regulations as of October 22, 2026. Final rules, the state list, and Form 8525 may change the details.
Related reading
- Itemize or take the standard deduction: the part of a scholarship gift above the credit may only help if you itemize
- How federal tax brackets work: credits come off after the bracket math
- Trump Accounts explained: another new 2025-law program for kids, with a different purpose
- IRS CP321J notice and the Saver’s Match: another federal benefit that starts in 2027
- How this federal tax estimate is built: what the calculator does and doesn’t model
- This year: tax: 2025 and 2026 brackets and standard deductions
This page summarizes the law and IRS/Treasury guidance as of October 22, 2026. Check IRS.gov before you give, because the participating-state list and the final rules may change.