Whether a child can receive a scholarship paid for through the new federal scholarship tax credit comes down first to household income, and the proposed rules put the cutoff at 300 percent of the area median gross income. The same proposal tells the nonprofits that hand out the scholarships to put 90 cents of every dollar of their income into scholarships. Treasury and the IRS announced the package on October 1 in release IR-2026-117, and the Federal Register published it on October 2 as docket REG-117199-25.
Both numbers are still open to change. The regulations are proposed, comments are due December 1, 2026, and a public hearing is scheduled for December 15.
A ceiling measured against the local median, not a fixed dollar line
The credit pays for scholarships to “eligible students,” and under the proposed regulations an eligible student must belong to a household whose income is “not greater than 300 percent of the area median gross income.” That wording comes from section 25F(c)(2)(A) of the tax code, which the proposal interprets. The proposal borrows “area median gross income” as the term is used in section 42 and counts household income by the Section 8 housing method in 24 CFR 5.609, with changes. Under the proposed modification, items not received in cash by a member of the household are disregarded, including the amount of a Section 8 housing allowance and any imputed return on assets.
A household, in the proposal’s definition, is the individual seeking to be an eligible student plus the group of persons residing with that individual. The limits also adjust for family size, and the IRS says it will publish the applicable limitations by geographic area and family size every year. Because the benchmark is local and the household count matters, the proposal sets no single dollar figure for the country. A family in a high-cost metropolitan area and a family in a low-cost rural county face different ceilings, and the same family faces a different one if its size changes.
The reach is wide by the agencies’ own estimates, though the two documents measure it differently. The Federal Register notice says approximately 95 percent of the children in the United States are in households below the 300 percent limit. Treasury’s release puts the share at approximately 96 percent of children in participating states.
The 90 percent floor and the other tests a scholarship organization must pass
A scholarship granting organization, or SGO, qualifies only if it meets a list the proposal restates from section 25F. It must be a section 501(c)(3) charity that is not a private foundation, keep separate accounts exclusively for qualified contributions, and appear on the list its State submits for the year. It must also “provide scholarships to 10 or more students who do not all attend the same school.”
The spending rule is the one in the headline: the organization must “spend not less than 90 percent of its income on scholarships for eligible students.” That is the 90 cents of each income dollar. The money does not have to go out in the year it arrives. The proposal allows income to be spent over more than one year, with the test applied as of the last day of the taxable year following the year in which the income is received.
The ceiling and the floor meet in a verification duty. An SGO must verify the annual household income and family size of each applicant so that students meet the area median gross income requirement, which makes the local benchmark the organization’s working document, not only the family’s. Scholarships may cover only qualified elementary or secondary education expenses described in section 530(b)(3)(A), must give priority to students who received an award the previous school year and to their siblings, and may not be earmarked for a particular student. An organization may not award a scholarship to a disqualified person under rules similar to section 4946.
Who the proposed rules are written for
The credit sits on top of this machinery. According to the IRS, individual taxpayers may claim a nonrefundable federal income tax credit of up to $1,700 for qualified cash contributions to eligible SGOs, and married couples filing jointly up to $3,400. States opt in voluntarily, and Treasury says 30 have already done so. By 2030 the agencies project 600 to 700 SGOs, nearly $26 billion in contributions a year and about 2.2 million scholarships annually.
IRS Chief Executive Officer Frank J. Bisignano said the rules “provide states, scholarship-granting organizations, and taxpayers with the clarity they need to prepare for this new education tax credit.” The Federal Register summary names the same three groups as those the proposal would affect: taxpayers who make qualified contributions, States that elect to participate, and the organizations certified as SGOs.
What is proposed, what is binding and when it applies
The 300 percent ceiling and the 90 percent floor sit in the proposed regulations, not in the companion rule. The temporary regulations published the same day take effect December 1, 2026, and cover state elections, electronic registration, donor acknowledgments and recordkeeping; they do not address income limits or the 90 percent rule. The proposed regulations are written to apply to taxable years ending after December 31, 2026.
The Federal Register notice for REG-117199-25 sets the record for what happens next: written or electronic comments must be received by December 1, 2026, and the IRS lists Constance Chien and Andrew Fahmy as the contacts for technical questions. Until the rules are finalized, the 300 percent and 90 percent figures are the Treasury Department’s and the IRS’s proposal.
When an IRS refund stalls, the notice decides the next step
For taxpayers whose federal refund is delayed, reduced or lost in the mail, the work is reading the status message or notice the IRS sends and knowing which step follows. That job exists whatever becomes of any tax credit.
The IRS Refund Recovery Kit is a 13-page kit with a notice decoder, a refund status tracker spreadsheet, the refund-trace steps for Form 3911 and the 3-year refund deadline.
Open The IRS Refund Recovery Kit →
This piece was drafted with AI assistance; every figure and date was checked against the Federal Register notices and the Treasury and IRS releases linked above.
