The Treasury Department and Internal Revenue Service on Thursday released proposed rules for the Education Freedom Tax Credit, moving the country’s first nationwide K–12 scholarship tax credit toward a Jan. 1 launch. The regulations answer several questions that have occupied governors, school systems and scholarship organizations since Congress created the program last year — and leave states with a consequential choice.

States may decline to participate. But under the proposal, a state that opts in could not limit the program to public-school services, exclude private or religious schools, or apply discretionary standards to keep an otherwise qualified scholarship organization off its list. That structure makes the decision less about designing a state-specific program than accepting or rejecting the federal framework.

A federal credit with broad reach

The Treasury announcement describes a nonrefundable, dollar-for-dollar federal income-tax credit for cash contributions to approved scholarship-granting organizations, or SGOs. An individual could claim up to $1,700 a year. The proposed regulation treats spouses filing jointly as separate taxpayers, permitting a combined credit of as much as $3,400 when each makes a qualifying contribution.

Scholarships could pay private-school tuition as well as tutoring, special-needs services, books, supplies, computers and other qualified K–12 expenses. Families would generally qualify when household income does not exceed 300 percent of area median income. Treasury estimates that its proposed safe harbors would make about 96 percent of children in participating states eligible, an estimate also reported by The Associated Press.

The reach could be large if taxpayer participation develops as the administration projects. Treasury estimates that by 2030, 11 million taxpayers could direct nearly $26 billion annually to 600 to 700 SGOs, supporting as many as 2.2 million scholarships. Those are agency projections, not appropriations or guaranteed participation levels.

States may opt in, but cannot redesign it

Thirty states have elected to participate, according to Treasury. The companion temporary regulations give states a Jan. 1 deadline to opt in and a Feb. 15 deadline to submit their lists of eligible SGOs for the first program year. Taxpayers could contribute to an approved SGO in any participating state, regardless of where they live.

The proposed rules preserve a state role in confirming that organizations meet general charitable, financial-reporting and fraud-prevention requirements. They sharply limit policy discretion, however. The Education Week review found that states would not be allowed to block particular types of SGOs or dictate which students they support. The regulation similarly says states could not restrict the kinds of schools scholarship recipients attend or the qualified expenses scholarships cover.

That means a governor cannot opt in solely for tutoring or disability services used by public-school students while excluding private-school tuition. Conversely, an SGO may direct scholarships toward public-school students if it follows the federal requirements. States retain the binary participation decision, but much of the program’s internal architecture would be federal.

Public schools have a pathway, too

The program is commonly described as a school-choice or voucher initiative because scholarships may pay private and religious school tuition. Yet public-school students do not have to leave their schools to benefit. The K-12 Dive analysis notes that scholarships may cover tutoring, disability services, books, computers and other qualifying expenses for students who remain enrolled in public schools.

For districts, that creates an unfamiliar funding channel. A nonprofit SGO, rather than a district or state formula, would receive tax-credited donations and award assistance to eligible students. Families receiving certain means-tested benefits could use categorical eligibility instead of reproducing income records, and foster children would receive a separate safe harbor. The rules also contemplate streamlined eligibility for certain tutoring and special-needs services in low-income areas.

Important boundaries remain unsettled. The proposed regulation says Treasury and the IRS plan additional guidance on what counts as a qualified expense and qualifying school connection. Schools and nonprofits therefore have enough information to assess participation, but not yet every detail needed to build reimbursement systems.

Oversight will follow the money

SGOs would have to be public charities, maintain separate accounts for qualified contributions, serve at least 10 students who do not all attend one school, and spend at least 90 percent of their income on scholarships. They also would verify household eligibility and could not earmark a donor’s contribution for a particular student.

The package adds annual reporting, audits, donor identification numbers and IRS portals intended to prevent duplicate awards and improper payments. States could enforce generally applicable charity rules and require documentation reasonably tied to federal eligibility or fraud prevention. The IRS could require a state to revise procedures after finding a pattern of irregularities.

The Educator's Takeaway

The immediate question for school leaders is not simply whether the program supports private-school choice. It is whether their state will participate and, if it does, whether public-school organizations are prepared to use the same SGO structure for tutoring, disability services, enrichment or instructional materials. Districts cannot assume state officials will be able to reserve the credit for public-school purposes, and private-school participation cannot be separated from the opt-in decision under the proposed framework. Administrators and nonprofit partners will also need to distinguish student eligibility from expense eligibility: the rules make the former broad, while more federal guidance on the latter is still promised. Any planning should therefore remain provisional until Treasury finalizes the regulations and clarifies qualified expenses.

What happens next

The proposed rule is scheduled for Federal Register publication on Oct. 2, followed by a 60-day public-comment period and a Dec. 15 hearing. Companion temporary regulations establish the registration, certification and reporting procedures needed for 2027. States, SGOs, districts and families now have a short runway to evaluate a program whose scope is national but whose availability will still depend on a state’s decision to join.