“Treasury Previews Education Freedom Tax Credit Guidance,” US Department of Treasury Release, June 10, 2026

In a significant move toward implementing the educational provisions of the Working Families Tax Cuts Act, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have begun outlining the regulatory landscape for the new federal scholarship tax credit.

In a June 10, 2026, press release, Treasury officials previewed forthcoming guidance intended to govern the "Education Freedom Tax Credit," a program scheduled to launch in January 2027. For tax professionals—including CPAs, EAs, and attorneys—these developments signal a complex new area of compliance involving state-level elections, scholarship-granting organization (SGO) oversight, and unique donor reporting requirements.

Overview of the Section 25F Credit

The newly enacted credit, established under Internal Revenue Code § 25F, is designed to incentivize private contributions to SGOs to expand K–12 educational opportunities. According to a Treasury Fact Sheet, the credit allows taxpayers to receive a "credit of up to $1,700 for contributions made to SGOs that would otherwise have been owed to the government in Federal income taxes."

The program’s implementation relies on a multi-step process:

State Opt-In: A state (or the District of Columbia) must voluntarily elect to become a “covered state” and designate qualifying SGOs.
SGO Listing: Covered states must provide a list of eligible SGOs to the IRS by January 1st of each calendar year.
Qualified Contributions: Taxpayers must make "charitable contribution of cash to a SGO listed on a State's SGO list for that taxable year."

Treasury Secretary Scott Bessent characterized the initiative as “a transformative step toward an education system that fits the student rather than the other way around,” adding that Treasury is “committed to providing certainty to states, scholarship-granting organizations, taxpayers, and families alike, as well as making certain that this process is easy to navigate.”

Guidance for SGOs: Qualification and Compliance

For organizations seeking to qualify as SGOs, the forthcoming regulations will introduce rigorous operational and accounting standards. In remarks delivered on June 9, 2026, Deputy Assistant Secretary for Tax Policy Kevin Salinger highlighted several critical areas that will be addressed in proposed regulations, expected by the end of September 2026.

The 90% Spending Requirement and Safe Harbors An eligible SGO must use "at least 90% of the income of the organization on scholarships for eligible K-12 students." To mitigate administrative burdens, Treasury is considering a safe harbor for organizations whose activities are largely scholarship-granting. Under this proposed rule, “income of the organization” could be measured by the amount held in a "section 25F segregated account, including qualified contributions and earnings."

Multi-State Operations and "Location" Standards SGOs operating across state lines should prepare for segmented compliance. Salinger noted that Treasury expects to define an SGO as “located in” a State if it is “authorized to do business in that State and complies with generally applicable State charitable-organization rules, including rules for transparency, accountability, and fraud prevention." Furthermore, an SGO may be listed on more than one participating state SGO list "as long as it is located in that State and maintains a separate section 25F account for that State."

Audit and Oversight Mandates To prevent fraud and abuse, each SGO will be required to obtain "an annual financial and programmatic audit by a qualified independent third party" and provide it to each covered State on whose list it appears. For smaller SGOs, the proposed rules may allow for a streamlined alternative where "the audit could be conducted by an internal committee unrelated to the organization's management, with the report signed under penalties of perjury."

Taxpayer Eligibility and Verification

The credit is available to citizens or residents of participating states who make qualified cash contributions. The benefit is targeted toward students from households with incomes "not greater than 300% of the area's median gross income."

SGOs will face new responsibilities regarding student verification. Treasury expects to allow SGOs to verify a student's household income directly through "documents such as paystubs, tax returns, IRS transcripts, Forms W-2, or through crediting agencies or commercial data sources." Additionally, the regulations may treat "foster children as satisfying the income requirement without separate income verification."

Reporting and Future Workstreams

Tax professionals should take note of a new reporting mechanism designed to protect privacy while ensuring matching accuracy. SGOs will provide each donor with "a timely written acknowledgment of their annual contributions," which will include "a unique donor number generated under an IRS-provided method." This allows the IRS to confirm that a claimed credit corresponds to an actual donor and SGO without requiring a donor to provide their Social Security Number to the SGO.

Finally, while Section 25F governs the credit, a separate regulatory workstream is expected for Internal Revenue Code § 530 regarding the scope of eligible expenses. Salinger confirmed that Treasury "fully intend[s] that scholarships may be used to support additive academic tutoring and special needs services."

Looking Ahead: Timeline for Professionals

September 2026: Treasury expects to issue proposed regulations; taxpayers/SGOs may rely on these for the 2027 tax year.
January 1, 2027: Commencement of the credit; deadline for states to submit annual SGO lists.
Ongoing: Development of an IRS-led "SGO portal" to support administration and reporting.

Prepared with assistance from LM Studio google/gemma-4-26b-a4b.