New Federal Tax Credit Could Deliver Dollars to Private and Public K-12 Schools Beginning in 2027

Summary — The Department of the Treasury and the IRS have released new proposed and temporary regulations for the Education Freedom Tax Credit, a first-of-its-kind federal program allowing individuals to reduce their federal tax liability dollar-for-dollar by contributing to nonprofit Scholarship Granting Organizations (SGOs). The update outlines critical baseline requirements for SGO certification, student eligibility criteria and immediate operational steps required by private and public school leaders before the program takes effect January 1, 2027.

Under a new federal program, public and private K-12 schools will soon be able to benefit from donations that families and other donors can claim as a federal tax credit, made through nonprofit scholarship granting organizations. The Education Freedom Tax Credit (the “EFTC”), created by the One Big Beautiful Bill Act, is the first federal tax credit of its kind, and it is designed to channel private dollars into scholarships for students at both private and public schools. Because the donor’s federal tax bill drops by the amount of the gift (up to $1,700 per person and $3,400 for couples filing jointly), a contribution can cost the donor little or nothing out of pocket. The IRS issued regulations on October 1, described more fully below, which explain how schools can access these funds.

Why This Matters to School Leaders

For private schools, the EFTC creates a new pipeline of scholarship support for current and prospective families, with tuition and fees paid by SGOs directly. For public school divisions, the EFTC can fund tutoring, educational therapies, and other kinds of support for students.  Any SGO established by a school or public school division must serve students at more than one school, award scholarships based on student eligibility rather than school affiliation, and operate independently of its sponsor. 

The IRS regulations issued on October 1 set a low bar for students to receive scholarships from SGOs. To receive a scholarship, a student must live in a household with income at or below 300% of the area median gross income, a threshold that covers most families in America. Scholarships may pay for qualified K-12 expenses, which, according to Treasury and IRS guidance, can include tuition and fees, tutoring, before and after school programs, special education services, and books and supplies. For recipient families, scholarship amounts used for qualified expenses are excluded from income.

How the Money Moves

An individual who is a United States citizen or resident makes a cash gift to an SGO and designates it as a qualified contribution. The donor may claim a credit of up to $1,700 per year, or up to $3,400 for a married couple if each spouse gives at least $1,700 and does not need to itemize deductions to do so. The SGO then awards scholarships to eligible students, giving priority to prior recipients and their siblings. Donors cannot direct a gift to a particular student, and gifts made through partnerships or S corporations do not qualify.  Any state tax credit claimed for the same gift reduces the federal credit.

Virginia’s Participation

The EFTC is not automatic. A state must (1) elect to participate and (2) certify a list of qualifying SGOs located in the state. Gifts to organizations that are not on a participating state’s list will not generate the credit for donors. 

Particularly in Virginia, former Governor Youngkin filed an election to participate in January 2026, making Virginia the first state to opt in.  Governor Youngkin’s administration also identified twelve “tentatively eligible” SGOs. To ensure Virginia’s participation for 2027, however, Governor Spanberger must still submit a certified SGO list by February 15, 2027.  If she does not, schools located in Virginia will not be able to benefit from this program in 2027. 

Once a state government elects to participate, its role becomes largely ministerial. Under the new regulations, a state government must list every qualifying SGO within the state that seeks inclusion.  The state government may not add requirements for SGO-certification beyond those already included in federal law (such as restricting the types of schools students may attend or the expenses scholarships may cover). 

Organizations approved under Virginia’s existing Education Improvement Scholarships Tax Credits program are not automatically eligible and must separately qualify under the EFTC’s federal rules.

What It Takes to Be an SGO

According to the new regulations, to qualify as an SGO, an organization must (1) be a § 501(c)(3) public charity, (2) keep EFTC gifts in a separate account, segregated from the rest of the organization’s donations, (3) award scholarships to at least 10 students who do not all attend the same school, (4) spend at least 90% of its income on scholarships, (5) verify family income for the students to whom it directs scholarships, and (6) not award scholarships to “disqualified persons,” a broad group including the SGO’s officers and directors, anyone involved in selecting recipients, significant donors, or extended family members of such groups. 

These requirements may be difficult for existing school foundations, which typically have missions beyond providing students with scholarships.  So many schools and divisions will find it simpler to partner with an established SGO, or form a new, single-purpose SGO. 

For 2027, a state may list organizations whose IRS exemption applications are still pending, which gives newly formed SGOs a path to participate in the first year.

The New Guidance

On October 1, 2026, the Department of the Treasury and the Internal Revenue Service released two types of regulations: (1) proposed regulations that would apply after a notice-and-comment period and (2) temporary regulations to apply in the interim. IRS and Treasury also issued companion FAQs.  Comments on the proposed regulations are due December 1, 2026.

Next Steps Before January 1, 2027

Private school heads and division superintendents should consider (1) identifying SGOs that will serve their students, or evaluating whether to form a new SGO; (2) confirming that any affiliated foundation can meet the federal SGO requirements or can be restructured to do so; (3) preparing communications for families and other donors that explain the new credit and distinguish it from Virginia’s existing scholarship program; and (4) monitoring whether Virginia submits a qualified SGO list on or before February 15, 2027. Because donors can begin giving as early as January 1, 2027, schools that are prepared early will be best positioned to benefit from the first year of the program.