Treasury and IRS propose rules for the new Education Freedom Tax Credit (Sec. 25F)

# What changed Treasury and the IRS issued proposed regulations (REG-117199-25) and companion temporary regulations (T.D. 10057) to implement the Education Freedom Tax Credit created under Section 25F. The program takes effect in 2027. It gives individual taxpayers a nonrefundable federal credit of up to $1,700 for qualifying cash contributions to eligible scholarship-granting organizations (SGOs). Married couples filing jointly may claim up to $3,400. Unused credits can be carried forward for up to five years.

# Who and what the rules cover The proposed regulations spell out student eligibility standards, how SGOs must operate, how states can participate, reporting requirements, and how the credit will be administered. Taxpayers may contribute to eligible SGOs regardless of the taxpayer's state of residence. The rules allow taxpayers to generally rely on an organization's inclusion on an IRS-maintained list of eligible SGOs when deciding to contribute.

# State participation and the ordering rule The proposed rules include an ordering rule that allocates benefit between state tax credits and the new federal credit. The purpose of that rule is to preserve the maximum available federal credit for donors who also qualify for a state tax credit. The temporary regulations provide the framework for state registration and interaction with IRS systems.

# Administrative and reporting requirements (temporary rules) T.D. 10057 establishes registration, reporting, and certification procedures for participating states and SGOs. Crucial operational elements include:

• IRS portals: States and SGOs must use IRS-created portals for registration and ongoing reporting.
• Donor acknowledgments: SGOs are required to give donors acknowledgments that include unique donor numbers. Those acknowledgments are part of the documentation donors will need to substantiate claims for the credit.
• Reporting to IRS: SGOs must report contribution information to the IRS so the agency can administer the federal credit and maintain the list of eligible organizations.

# Practical effects for taxpayers and SGOs

# Timing and comment period

# Immediate steps for advisers and organizations Advisers should prepare clients who might donate in early 2027 by confirming prospective SGOs are on the IRS list, documenting acknowledgments, and tracking whether any state credit applies. SGOs should prioritize completing registration in the IRS portal and setting up systems to issue the required donor acknowledgments and to report contributions to the IRS.

# Where to find more information The IRS will post details about participating states and the federal scholarship tax credit on its Federal Scholarship Tax Credit page, and the formal notices identify the regulatory citations: REG-117199-25 (proposed) and T.D. 10057 (temporary).