Treasury and IRS Issue Proposed Regulations for New Education Freedom Tax Credit
The Treasury Department and the Internal Revenue Service have released proposed regulations (REG-117199-25) along with companion temporary regulations (T.D. 10057) to implement the federal education freedom tax credit. Under Internal Revenue Code Section 25F, this credit provides a federal tax offset for taxpayers who make qualifying cash contributions to organizations that grant scholarships for elementary and secondary education.
Beginning in tax year 2027, eligible individual taxpayers may claim a nonrefundable credit of up to $1,700 annually for cash donations made to participating scholarship-granting entities. Married couples filing jointly can claim a combined maximum credit of up to $3,400. If a taxpayer cannot claim the full credit amount in the year the contribution is made due to tax liability limits, the guidance allows unused credit balances to be carried forward for up to five years.
The proposed regulations address several practical operational rules for potential donors. Taxpayers will be permitted to contribute to qualifying scholarship organizations regardless of whether they reside in the same state as the organization. To streamline eligibility verification, taxpayers may generally rely on an official list published by the IRS. Furthermore, the proposed guidance establishes an ordering rule intended to protect the maximum available federal credit for individuals who qualify for both state-level tax credits and the new federal credit.
The accompanying temporary regulations set out registration, reporting, and certification requirements for participating states and scholarship organizations. The IRS plans to establish online portals that states and scholarship-granting entities must use for registration and reporting. Under these rules, scholarship organizations will need to issue formal acknowledgments to donors containing unique donor numbers and submit detailed contribution information directly to the IRS.
These developments provide early clarity for individuals and tax planners preparing for the 2027 rollout of Section 25F. Individual taxpayers interested in structuring future charitable contributions or managing taxable income can begin evaluating how these scholarships fit into broader tax strategies once official lists and portals go live. Written public comments on the proposed regulations may be submitted through December 1.
Source: Journal of Accountancy
