New U.S. Treasury Guidance Prepares States for Upcoming Federal Scholarship Tax Credit Program
The upcoming Education Freedom Tax Credit program, initiated under President Donald Trump’s 2025 tax legislation, is approaching its official start. Ahead of its January launch, the U.S. Department of the Treasury has issued key guidelines for states, scholarship-granting organizations (SGOs), and taxpayers to facilitate smooth participation.
This innovative program offers individuals a direct federal tax credit of up to $1,700 for donations to designated SGOs, with married couples filing jointly eligible for a $3,400 credit. Importantly, these contributions are not restricted by the donor’s residency, allowing taxpayers nationwide to participate.
While primarily intended to support K-12 scholarships at private institutions, the funds can also assist students in public schools by covering expenses like tutoring, books, supplies, extended-day programs, and disability services.
According to the Internal Revenue Service, 30 states have already committed to the program. States have a deadline to opt in by January 1 and must submit their SGO lists by February 15. A Treasury official emphasized that states are required to include all qualifying SGOs on their lists, without preference.
Participating states include Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming. New York’s Governor Kathy Hochul is considering participation pending further review of the federal regulations.
However, some states, led by Democratic governors in Hawaii, Minnesota, New Mexico, and Oregon, have opted out. In certain regions, partisan disagreements have emerged. Although Democratic governors in North Carolina and Kansas initially vetoed participation, Republican legislatures overruled these decisions. Conversely, Arizona and Wisconsin’s Democratic governors successfully vetoed similar legislation.
The program targets students from households earning up to 300% of the median income of their area, a threshold encompassing approximately 95% of American children. In the 30 participating states, an estimated 28 million children could qualify for these scholarships.
As per the federal guidelines, states have limited authority over SGO regulations and cannot override federal stipulations. SGOs must conduct annual financial audits submitted to states, which use these reports to identify problematic organizations and prevent fraudulent activities, such as duplicate scholarship payments.
To qualify, SGOs must be 501(c)(3) nonprofits, remain independent of private foundations, and maintain separate accounts for qualified contributions. They are obligated to spend at least 90% of their income on scholarships, serve a minimum of 10 students from different schools, and verify the household income and family size of recipients.
Further, SGOs must prioritize students who were awarded scholarships in the previous year, followed by their siblings. Students who would otherwise attend public schools are also eligible for these scholarships. Homeschool definitions will adhere to individual state laws.
The Treasury projects that by 2030, there could be between 600 and 700 SGOs, supported by over 11 million taxpayers, contributing nearly $26 billion annually. This could result in approximately 2.2 million scholarships each year.
