The U.S. Department of the Treasury has revealed some new details about the federal school choice tax credit that will offer people in participating states up to a $1,700 annual refund for donations made to qualifying “scholarship granting organizations.” A document released by the department reiterates that donations supporting public school students will be eligible for the tax credit, but doesn’t fully elucidate applicable expenses.
North Carolina opted into the federal tax credit program, called the “Education Freedom Tax Credit,” earlier this month following the override of Gov. Josh Stein’s veto. When Stein vetoed the bill enrolling North Carolina in the program, he said he wanted to wait for federal guidance but intended to enroll eventually.
“We need to put more public dollars into our public schools, and I will continue to do everything I can to provide more support for public school kids,” Stein said in a statement after the veto override. “I see potential opportunities for public school students to benefit from this program.”
The Treasury Department has said that full guidance for the program will be released by the end of September. In the meantime, some new information was previewed last week in remarks by Kevin Salinger, deputy assistant secretary for tax policy at the department.
Below, see highlights from Salinger’s remarks. You can read a transcription of the remarks here. See a previously released fact sheet here. Finally, read the full provision (Section 70411) detailing the tax credit here.
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How will the federal tax credit work?
The federal school choice tax credit is the first federal school choice program of its kind, allowing taxpayers from enrolled states to deduct up to $1,700 per year for donations made to qualifying scholarship granting organizations (SGOs). Over 30 states, including North Carolina, have enrolled so far.
The program, which is set to begin in tax year 2027, has the potential to match North Carolina’s private school voucher program, according to an analysis cited by the federal government. The analysis 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. By 2031-32, the General Assembly is set to appropriate $800 million per year to the Opportunity Scholarship Grant Fund Reserve.
Following this month’s veto override, the North Carolina State Education Assistance Authority (NCSEAA) is authorized to submit a list of qualifying SGOs to the federal government under North Carolina law. NCSEAA also handles disbursement of funds for the Opportunity Scholarship program.
Some of the requirements to qualify as a scholarship granting organization 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. 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.”
Read more about school choice
New details from Treasury
Salinger’s recent remarks provide some new details on what the federal school choice tax credit will look like.
Tuition for private school students, tutoring for public school students
Scholarships from SGOs eligible for tax-deductible donations will include “a
broad set of expenses incurred in connection with or required by any K-12 public, private, or charter school,” according to the Treasury fact sheet. That “broad set” of qualifying expenses hasn’t been revealed yet, but will include academic tutoring services and support services for students with disabilities, according to the fact sheet.
Salinger reiterated that public school students will be able to benefit from scholarships in his recent remarks, saying “we fully intend that scholarships may be used to support additive academic tutoring and special needs services, and we expect future guidance to address those issues in more detail.”
Salinger said that future guidance on qualifying expenses will be “a separate workstream” that will follow the issuance of the September details.
Homeschool students will be eligible for scholarships
In his remarks, Salinger said that 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.
Income verification
Salinger said that it is important to ensure income verification — verifying that students come from households making 300% or less of the local area median gross income — is “reliable, but not unnecessarily burdensome for families.”
To do that, he said the Treasury expects the rules to allow SGOs to verify income through pay stubs, tax returns, W-2 forms, or Internal Revenue Service (IRS) transcripts.
No substantive state restrictions on SGOs
Salinger clarified that an SGO counts 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.”
He also said that states will not be allowed to impose “substantive SGO-specific requirements that are more restrictive” than the federal government’s requirements.
Multistate SGOs
Salinger’s remarks clarified that SGOs that want to operate in multiple states will be eligible to do so, as long as separate accounts are maintained for each state.
Preventing fraud and abuse
Salinger said states have “raised real concerns about fraud and abuse.”
“Participating States would still be expected to take reasonable steps to prevent fraud and abuse, including processes to prevent duplicate awards to the same student for the same expense,” Salinger said. “One possible approach would be to require a formal scholarship acceptance certifying that no other award has been received for the same expense, but we welcome input on administrable ways to address this risk. We are also considering appropriate safeguards to help prevent misuse of scholarship funds.”
He also said SGOs would be subject to annual audits by a third-party organization, with smaller SGOs able to conduct their own audit using an “internal committee unrelated to the organization’s management,” with the audit signed under penalties of perjury.
Other details
Salinger also spoke about a planned IRS portal, logistics for verifying taxpayers are eligible for the tax credit when filing their taxes, and what numbers are used to calculate the 90% income number for SGOs. Read his full remarks here.
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