Starting January 1, 2027, there’s a brand new federal tax credit that many people haven’t heard of yet.
It’s called the Education Freedom Tax Credit. You basically donate cash to a nonprofit that funds K-12 scholarships, and you get a CREDIT (not a deduction) against your federal income tax. Treasury just released proposed rules, so let me break down how it works.
Basics
The nonprofits are called Scholarship Granting Organizations (SGOs). They’re public charities that spend at least 90% of their money on scholarships, which can cover private school tuition, tutoring, special-needs services, books, and supplies.
The credit is up to $1,700 per person, or $3,400 on a joint return.
Credit vs deduction
To make sure you understand, a credit reduces your tax bill dollar for dollar. A deduction only reduces your taxable income.
Say you owe $20,000 in federal income tax and donate $1,700. With a credit, your tax bill drops to $18,300. With a deduction, you would save ~$400 (assuming 24% marginal rate)
You can’t take both for the same donation, but just showing why this new tax credit can be beneficial, instead of donating to another non-profit.
Say you gave $1,000 to a cancer non-profit. You would only get a deduction. But with this new tax credit, if you gave $1,000, you would be able to get a credit for $1,000. So in a way, you are re-directing money from your tax bill into something that can make a difference for students.
Who can claim it
US citizens and residents who give cash to an eligible SGO. There’s no income limit for donors, and you don’t need to itemize. The only limit is that the credit can’t exceed the federal income tax you owe.
Where you can give
Individual states have to opt in, and 30 have so far. But you can give to an SGO in any participating state, even if your own state hasn’t opted in. Of course, many people want to donate to an SGO in their own state, so that’s just something good to know. Here’s a list of states that have opted in so far.
How to give
Because of the new credit, states have until February 15, 2027 to opt in.
After they have opted in, they will be to identify SGOs in your state. The IRS then will have a list available that you can reference BEFORE making your donation.
After donating, tell the SGO when you give that the gift is meant for the credit, and keep the written acknowledgement with your donor number. The SGO has to send it by January 31 of the following year. You won’t have to give them your Social Security number.
A 2027 gift gets claimed on your 2027 return, which you’ll file in 2028.
Which students qualify
Students eligible to enroll in public school, from households earning up to 300% of the area median income. Treasury estimates about 95% of kids live in households that meet it. Scholarships are also excluded from the family’s taxable income.
Fine print
It’s non-refundable. So if you owe $1,000 of tax for the year, and donated $1,700, i will reduce your tax to 0, but you don’t get a refund for the excess. Unused credits can be carried forward to the next year.
Also, if your state gives a credit for the same donation, it reduces the amount eligible for the federal credit before the cap of $1,700 applies. The rules also aren’t final yet, though you can rely on them for 2027 gifts.
Importantly, before donating, wait until the IRS publishes a full list of SGOs that are eligible.
Hope you enjoyed this one!
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