The Treasury Department and the IRS announced on October 1, 2026 the first rules for a new federal credit on gifts to scholarship granting organizations, which Treasury calls the Education Freedom Tax Credit. The credit is first available for 2027, and its amount shrinks by any state credit the same donor claims on the same contribution. The rules arrived as temporary regulations and as a companion proposed rule that stays open for public comment until December 1, 2026.
How section 25F nets a state credit out of the federal one
The offset is written into the statute. Section 25F reduces the federal credit allowed for a year by the amount allowed as a credit on the taxpayer’s state return for qualified contributions made during that year. The proposed rule published in the Federal Register on October 2 (REG-117199-25) spells out the arithmetic in proposed section 1.25F-2(c)(1). It starts with the taxpayer’s qualified contributions for the year, made while a United States citizen or resident, and subtracts, but not below zero, the sum of any state credits for those same contributions. Only then does the $1,700 limit apply.
Three steps follow from that text: add up the qualified gifts, subtract the state credits allowed on those gifts, and cap what remains. Treasury’s own press release describes the proposed ordering as a “taxpayer-favorable ordering rule” for individuals who may qualify for both state credits and the new federal credit. The favorable part follows from the sequence: because the state credit comes off the gift before the cap is applied, a gift larger than the cap can absorb a state credit without the federal credit falling below the limit.
The $1,700 and $3,400 limits and a credit that cannot create a refund
The IRS announcement, IR-2026-117, says eligible taxpayers may claim an annual credit of up to $1,700, and up to $3,400 for married couples filing jointly. It calls the credit a nonrefundable federal income tax credit. A nonrefundable credit can reduce income tax owed but is not paid out beyond the tax a return shows. The taxpayer, not the scholarship organization, claims it, and the limit applies per taxpayer for each year.
The IRS describes the mechanics in plain terms: taxpayers make qualified cash contributions to eligible scholarship granting organizations in participating states, then claim the federal credit on their returns. A scholarship granting organization must generally be a section 501(c)(3) public charity, keep qualified contributions separate, meet the statute’s scholarship and operating requirements, and appear on the state’s list.
2027 is the first year, and nothing changes on a 2026 return
Section 25F applies to taxable years ending after December 31, 2026, and the IRS says contributions count from January 1, 2027. A gift made in 2026 does not qualify, and the credit cannot appear on a return for 2026. The first return that can carry it is the one for tax year 2027.
That date matters for the state-credit offset too. The proposed ordering rule is not final, and its applicability date matches the statute’s: taxable years ending after December 31, 2026. Written or electronic comments on the proposed rule are due December 1, 2026, through regulations.gov (referencing IRS and REG-117199-25) or by mail to CC:PA:01:PR (REG-117199-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. A public hearing is set for December 15, 2026, at 10 a.m. Eastern, and requests for building access are due by December 10 at 5 p.m. The Federal Register names Constance Chien and Andrew Fahmy as the IRS contacts.
What the temporary regulations decide, and what they leave to the proposed rule
The binding half of the package is Treasury Decision 10057, temporary regulations effective December 1, 2026. They govern reporting by scholarship granting organizations, the procedure by which a state elects to take part, and state certification of eligible organizations. The IRS used a good-cause basis to skip notice and comment for them so that states and organizations could implement before January 1, 2027.
The temporary regulations touch state credits only lightly. A state must describe any tax credit under its own law, including the relevant statutes, regulations and guidance, available for contributions to scholarship granting organizations. They contain no explicit provision reducing the federal credit by a state credit. That reduction sits in the statute and in the proposed rule, which is why the open comment period is where the ordering is still unsettled. A state’s election lasts for a single calendar year, and the state must meet every requirement annually. Thirty states have opted in so far, according to the IRS.
What Treasury, Education and the IRS said, and what they forecast
Treasury Secretary Scott Bessent said the credit “marks a new chapter in educational freedom and opportunity by establishing America’s first nationwide school choice program.” Education Secretary Linda McMahon called it “the largest expansion of school choice in history.” IRS Chief Executive Officer Frank J. Bisignano said the IRS is committed to implementing the new law.
The official projections are forecasts, not results. By 2030, the IRS and Treasury expect 600 to 700 scholarship granting organizations, nearly $26 billion in annual qualified contributions and funding for about 2.2 million scholarships a year. Treasury also forecasts up to $3 billion in additional annual contributions and roughly 450 more organizations from a multistate safe harbor, and estimates that about 96 percent of children in participating states would be eligible for scholarships under the proposed rules and safe harbors.
The record for the offset itself is narrow and dated: the statute, the proposed section 1.25F-2(c)(1) published October 2, 2026, and a December 1 comment deadline.
Where a nonrefundable credit meets a return’s bottom line
The school donation credit will not touch a 2026 return, and its state-credit offset is still in the proposed-rule stage. The practical job that remains is on the return that finally can carry it, the 2027 return, where the credit can lower tax owed but cannot itself create a refund.
The IRS Refund Recovery Kit includes a refund status tracker spreadsheet and the 3-year refund deadline, for following whatever a return ends up paying out.
Open the refund status tracker for the first return that can carry the school credit →
This piece was drafted with AI assistance; the offset mechanics and dates were checked against the Federal Register proposed and temporary rules and the IRS and Treasury announcements of October 1, 2026.
