The Treasury Department and IRS issued proposed regulations providing guidance on the new Federal Scholarship Tax Credit, effective in 2027. The credit is designed to encourage contributions to scholarship granting organizations (“SGOs”) that provide financial assistance for eligible K-12 students.
Under the new rules, individual taxpayers may claim a dollar-for-dollar, non-refundable federal income tax credit of up to $1,700 per year for qualified contributions to an SGO. For married couples filing jointly, each spouse may claim a credit of up to $1,700, allowing for a combined credit of up to $3,400. The new credit may create significant opportunities for both families seeking assistance with K-12 education expenses and taxpayers interested in supporting educational scholarships while receiving a federal tax benefit.
The proposed regulations provide detailed rules intended to make the new credit accessible to families and administrable for taxpayers, states, and SGOs while protecting scholarship funds from fraud and abuse.
- The proposed regulations provide rules for applying the statutory household-income limitation and would generally disregard non-cash items, such as imputed return on home equity in order to increase access for students.
- In an effort to expand educational choice, the proposed regulations provide that participating states would not be permitted to impose SGO operating requirements that are more restrictive than those established by section 25F, including restrictions based on the type of school scholarship recipients may attend or the types of qualified education expenses scholarships may fund. The proposed regulations also would not permit a State to use discretionary certification standards to exclude otherwise qualifying SGOs.
- The proposed rules provide a framework for multistate SGOs, including an operational requirement safe harbor for qualifying organizations whose activities are at least 85 percent scholarship-granting activities. Treasury and IRS estimate that this safe harbor could enable approximately 450 additional organizations to participate and increase qualified contributions by up to $3 billion.
- In order to ensure that taxpayers can access the maximum credit allowed by law, the proposed regulations provide a taxpayer-favorable ordering rule for individuals who may qualify for both state tax credits and the new federal credit. They also provide rules for carrying unused section 25F credits forward for up to five years and generally permit taxpayers to rely on an organization’s inclusion on the IRS SGO list when making a contribution.
- The proposed and temporary regulations establish reporting, verification, and audit requirements designed to prevent duplication, improper payments, and other fraud or abuse. They provide for IRS portals for participating states and SGOs, unique donor numbers that avoid requiring SGOs to collect donors’ Social Security numbers, annual SGO reporting and audits, and procedures for removing organizations that fail to satisfy applicable requirements.
The companion temporary regulations provide states and SGOs with rules they need now to prepare for 2027, including procedures for state elections and certification of SGOs, electronic registration, donor acknowledgments, and reporting of qualified contributions. These procedures are intended to give taxpayers certainty that contributions are being made to qualifying organizations and to give states and SGOs sufficient time to establish the systems necessary for the incentive’s launch. Taxpayers, states, and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027.
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