Federal Scholarship Tax Credit: What the IRS's Proposed Rules Say About the $1,700 Credit

On October 1, 2026, the IRS and Treasury announced proposed regulations for a new tax credit created by the 2025 budget law: the Federal Scholarship Tax Credit, also called the Education Freedom Tax Credit. The proposed rules appear in the Federal Register as document 2026-20277. This article explains the mechanics in plain terms. It takes no position on the policy.

Credit vs. deduction

A deduction reduces the income you're taxed on. A credit reduces the tax you owe, dollar for dollar. This credit is nonrefundable, meaning it can bring a tax bill down to zero but won't produce a refund beyond that. According to the IRS, unused credit can be carried forward, and the proposed rules describe a five-year carryforward.

How the IRS describes the credit

Based on the IRS release and the Federal Register notice:

• Amount. Up to $1,700 per individual for qualified cash contributions to a scholarship granting organization (SGO). The proposal reads the statute's "per taxpayer" cap as per individual, so a married couple filing jointly could claim up to $3,400 if each spouse made qualified contributions of up to $1,700. That reading appears in a proposed rule, not a final one, and could change.
• What counts. A qualified contribution is a charitable cash contribution to an SGO that funds scholarships for eligible students within the state. The proposal would reduce the contribution amount by any state credit received before applying the $1,700 limit. Contributions made through a partnership or S corporation would not count for the individual partner or shareholder.
• Start date. The credit applies to contributions beginning in 2027, according to the IRS.
• States must opt in. A state (or the District of Columbia) has to elect to participate and give the IRS a list of its SGOs. The IRS says individuals cannot claim the credit for donations to an SGO in a state that has not opted in. The IRS maintains a participating-states page, which is the place to check current status.
• Who the SGOs are. Generally 501(c)(3) public charities that keep these contributions separate and are on the state's SGO list. The statute requires an SGO to spend at least 90% of its income on scholarships for eligible students, according to the notice.
• Claiming it. Taxpayers claim the credit on Form 8525 and report a unique donor number that the SGO provides. The proposal has SGOs supply written acknowledgments by January 31 of the following year.

Dates to know

• Comment deadline: December 1, 2026, at regulations.gov using the reference REG-117199-25.
• Public hearing: December 15, 2026, at 10 a.m. Eastern. Requests to speak and topic outlines are due December 1.

These are proposed regulations, so the final text can differ. The IRS also issued companion temporary regulations covering items such as state elections and SGO certification, which this article doesn't cover.

What the credit does and doesn't tell a household

Whether a household could use a credit like this depends on its tax liability, whether its state participates, and which SGOs are approved there. The IRS notes that liability limits apply, because a nonrefundable credit can't exceed the tax it offsets. This article can't say whether the credit applies to any particular reader, and it is not a recommendation to make or avoid a contribution.

Where to look

The IRS release, the Federal Register notice (document 2026-20277) and the IRS participating-states page have the primary details and are updated as things change. For a specific household, a qualified tax professional can explain how a credit would interact with its own return.

This article is educational commentary on public tax developments, not personalized tax, legal, or investment advice.