US Treasury Department issues proposed rules on federal school choice tax credit
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) released long-awaited proposed rules Thursday on the federal school choice tax credit that will offer people in participating states up to a $1,700 annual tax credit for donations made to qualifying “scholarship granting organizations.”
The department released two sets of proposed rules: a 181-page document of proposed regulations to implement the tax credit, and a 61-page document of temporary regulations to establish procedures for states and scholarship granting organizations (SGOs) to prepare for the launch of the tax credit on Jan. 1, 2027, per a department press release.
“By 2030, Treasury and the IRS estimate that the program could support 600 to 700 SGOs, with more than 11 million taxpayers making nearly $26 billion in qualified contributions annually and funding as many as 2.2 million scholarships each year,” the release says.
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North Carolina opted into the federal tax credit program, called the “Education Freedom Tax Credit,” in June following the override of Gov. Josh Stein’s veto.
When Stein vetoed the bill in August 2025, he said he was waiting for “sound guidance” from the federal government on how the school choice program would be implemented. After House Bill 87 was overridden, Stein said he saw “potential opportunities for public school students to benefit from this program.”
“We are working on a solution to make it easy for North Carolinians like me who want to direct their federally reimbursed donations to scholarship-granting organizations that directly benefit public school students, and I look forward to sharing more once the federal guidance has been provided,” he said in June. “Together, we can elevate high-impact programs that support public school kids with tutoring, after-school programs, summer learning, workforce development, and more.”
Last month, the Carolina Journal reported that NC Education Corps, a statewide tutoring nonprofit, is creating a separate SGO-arm that school districts and other groups can partner with to receive donations from the tax credit. John-Paul Smith, executive director of NC Education Corps, told the Carolina Journal that the nonprofit wanted to help school districts benefit from the funding without having to take on the administrative burden themselves.
In Columbus County, the Carolina Journal also reported that a group of current and former school employees formed a nonprofit — the Columbus County Educational Opportunity Foundation — to become a qualifying SGO and capture donations under the program.
“Ultimately, our goal is to support the school system by providing educational opportunities for students that may fall outside the scope of normal state, federal, and local funding,” president Kelly Jones told Carolina Journal. “Our students deserve it, our community deserves it, and our foundation is standing by to make this extraordinary opportunity happen for our children.”
NC Ed Corps’ Smith told EdNC in an email that the nonprofit’s SGO will still need to be approved by the North Carolina State Education Assistance Authority (NCSEAA) — the organization designated in statute with approving and publishing a list of participating SGOs — to operate in North Carolina. NCSEAA also handles disbursement of funds for the Opportunity Scholarship program.
State law gives NCSEAA 120 days after federal regulations come out to finish its rules. The propose rules say that the deadline for states to finalize their SGO rosters is Feb. 15, 2027.
States must opt in by Jan. 1, 2027 at 11:59 p.m. for their K-12 students to receive scholarships next year. Currently, there are 30 states, including North Carolina, that have opted into the tax credit.
“Education freedom is the key to unlocking opportunity and success for our next generation of students,” said U.S. Secretary of Education Linda McMahon in the Treasury press release. “The Education Freedom Tax Credit, the largest expansion of school choice in history, will supercharge those opportunities for millions of children.”
Below, find highlights on the tax credit and a first look at the new proposed regulations. See a previously released fact sheet here and read the full provision (Section 70411) detailing the tax credit here. Finally, you can view the NCSEAA website on SGOs here, which will be updated as federal regulations become finalized.
How the tax credit will work
The federal school choice tax credit is the first federal school choice program of its kind, allowing taxpayers from enrolled states to claim an annual tax credit of up to $1,700 for contributions to qualifying SGOs. Thursday’s guidance clarified that threshold is $3,400 for married couples filing jointly.
Some of the requirements to qualify as an SGO under the federal program include:
- Be on the list submitted to the federal government;
- Be classified as a tax-exempt 501(c)(3) organization;
- Not be a private foundation;
- Not co-mingle contributions with funds for purposes other than scholarships;
- Provide scholarships to at least 10 students who do not all attend the same school;
- Not earmark funds for specific students;
- Prioritize returning students and siblings of current recipients;
- Spend not less than 90% of the organization’s income on scholarships for eligible students;
- Provide scholarships only for elementary and secondary education expenses; and
- Verify students awarded scholarships come from households that make under 300% of the local area median gross income (equivalent to more than $300,000 in some parts of the country).
Eligible students must live in the same state as the organization, come from households that meet the income requirement, and must qualify to attend a public elementary or secondary school. On Thursday, the department said approximately 96% of children in participating states are expected to be eligible. Scholarships could then go toward private school tuition or “other education-related services and products,” according to the Treasury fact sheet.
Because public schools don’t charge tuition, donations intended to support public school students would have to go toward those “other education-related services and products.”
The Treasury press release published on Thursday specifies that expenses could include “academic tutoring, special-needs services, books, supplies, computers and other equipment, and other qualifying expenses connected with a student’s enrollment or attendance.”
Regarding more information on what counts as a qualified expense, the proposed rules document says the Treasury and IRS intend to “issue that guidance as soon as possible so that taxpayers may rely on it.”
Homeschools will qualify as schools under the program as long as they are treated as schools under state law. That means that in North Carolina, homeschool students should be able to receive scholarships, as state law requires homeschools be registered with the state.
Donors anywhere in the country can participate, so long as they direct up to $1,700 to an approved SGO in a participating state.
An analysis cited by the federal government estimates that North Carolina could receive over $700 million in donations reimbursed by federal dollars, assuming 30% of qualifying taxpayers took advantage of the tax credit.
Related reads
First look at details from the new guidance
According to Thursday’s press release, “The proposed regulations provide detailed rules intended to make the new credit accessible to families and administrable for taxpayers, states, and SGOs while protecting scholarship funds from fraud and abuse.”
Highlights from the proposed rules for implementing the tax credit include:
- Regulations providing rules for applying the statutory household-income limitation, generally disregarding non-cash items.
- Streamlined eligibility verification rules for certain families participating in needs-based programs, foster children, and certain students receiving tutoring or special-needs services in low-income areas.
- A prohibition on participating states imposing “SGO operating requirements that are more restrictive than those established” in federal law, “including restrictions based on the type of school scholarship recipients may attend or the types of qualified education expenses scholarships may fund.” This means that Democratic governors, for example, cannot bar donations directed at private schools or students, or students not from low-income families.
- A framework for SGOs to operate in multiple states. Under the rules, multistate SGOs can allocate a donation to any state where they appear on the approved list.
- A taxpayer-favorable ordering rule for individuals who may qualify for both state tax credits and the new federal credit. There are also rules for carrying unused tax credits forward for up to five years.
- The establishment of reporting, verification, and audit requirements “designed to prevent duplication, improper payments, and other fraud or abuse.” There will be an IRS portal for SGOs and participating states, and annual independent audits of SGOs will be required.
Highlights from the temporary regulations for states and SGOs include “procedures for state elections and certification of SGOs, electronic registration, donor acknowledgements, and reporting of qualified contribution,” per the press release.
“These procedures are intended to give taxpayers certainty that contributions are being made to qualifying organizations and to give states and SGOs sufficient time to establish the systems necessary for the incentive’s launch,” the press release says. “Taxpayers, states, and SGOs may rely on the proposed regulations for qualified contributions beginning January 1, 2027.”
The rules will be open for public comment through the end of November, with the department set to hold a public hearing on the proposed rules on Dec. 15. Stay tuned as EdNC continues to review the new proposed regulations.
Behind the Story
This article includes previous reporting from EdNC reporter Ben Humphries.