The §25F proposed regulations, explained: what Treasury's October 2026 rules mean for donors, families, SGOs, and states

On October 1, 2026, Treasury and the IRS filed the §25F proposed regulations (REG-117199-25) and companion temporary regulations (T.D. 10057) for Federal Register public inspection. This is our practical walkthrough of both, organized by who you are: donors, families, SGO operators, and states. It began in June as a walkthrough of Treasury’s June 9, 2026 preview (published June 10); a section near the end lists what changed between that preview and the rules as released. For the news story, see our coverage of the release; for Treasury’s own framing, the October 1 press release and fact sheet.

What was released, and what is binding

There are two documents. The proposed regulations (181 pages, RIN 1545-BR97) are the full rulebook: the donor’s credit, what an SGO must do, SGO reporting and audits, and state participation. The temporary regulations (61 pages, RIN 1545-BS17) take the pieces needed before January 1, 2027 and put them in force without waiting for comments. Treasury used the Administrative Procedure Act’s good-cause exception, finding that the time before the credit starts “is insufficient to receive, review, and meaningfully respond to public comments.” Their text is identical to the matching proposed sections, so comments on them go through the proposed rule.

That leaves three tiers, and it matters which one a rule sits in:

• Binding (temporary regulations). The definitions of “located in a State” and “qualified contribution” (including what counts as cash), single-State versus multistate SGOs, SGO registration in the IRS SGO portal, the January 31 donor acknowledgment and February 28 IRS report, and the procedures for state elections, state SGO lists, the bar on more restrictive state rules, and the IRS SGO list. They take effect 60 days after Federal Register publication (December 1, 2026, for the October 2 publication), apply by their terms on or after September 1, 2026, and expire no later than October 1, 2029.
• Proposed, with reliance. Everything else: the credit calculation and the $3,400 joint-return reading, the state-credit ordering rule, the SGO definition and segregated account, the 90% test and 85% safe harbor, payment rules, income verification, the residence test, priority, disqualified persons, the annual certification, and the audit. Taxpayers, organizations, and states “may rely on these proposed regulations for qualified contributions made on or after January 1, 2027,” provided they follow the portions that apply to them “in their entirety and in a consistent manner.” Final rules could change any of it.
• Still open. The detailed list of qualified expenses and the meaning of “school” (separate section 530 guidance), Form 8525 and its instructions, the opening of both IRS portals, the yearly income tables, and the uniform donor-number format.

Key dates

Dates for the rulemaking itself, then the first program year. The status column says whether a date comes from the statute, the binding temporary regulations, or the proposed rules. A full calendar from enactment forward is in our EFTC timeline.

More on the deadlines that bite first: how to comment or testify and the February 15 list deadline and what it means for new SGOs.

For donors: $3,400, state credits, and what counts

The biggest open question for donors was whether a joint return gets one $1,700 cap or two. The proposed rule answers it: “married taxpayers who elect to file a joint return … are treated as separate taxpayers.” A couple can claim up to $3,400 on a joint return when each spouse makes and designates a qualified contribution of at least $1,700; in the rule’s example, each spouse gives $2,000 and each gets a $1,700 credit. The combined credit is still limited by the couple’s tax liability. The credit follows each spouse’s own designated gift, and the proposal does not say how a single gift from a joint account would be split between spouses, so the safe practice is the one in Treasury’s example: two gifts, one per spouse, each designated when made. Details in our $3,400 explainer.

State credits come off before the cap, not after. A $2,500 gift that earns a $500 state credit leaves $2,000, so the federal credit is the full $1,700, and the donor gets $2,200 back in total. If the state credit pulls the designated amount under $1,700, the federal credit shrinks to match: in the rule’s Example 3, $2,000 of designated gifts with a $400 state credit yields a $1,600 federal credit. A state credit that covers both designated and non-designated dollars is applied first to the non-designated dollars: in Example 4, a donor gives $4,000, designates $1,700, and claims a $400 state credit, and still gets the full $1,700 federal credit. A state deduction does not reduce the federal credit at all, and state credit carryforwards or carrybacks count as allowed in the year of the gift. The combined benefit never exceeds the gift. See the ordering rule, worked through and §25F versus state tax credits.

What counts as a gift is part of the binding temporary rules. A qualified contribution is cash given by an individual: currency, check, money order, electronic transfer (including credit and debit cards), or after-tax payroll deduction, in U.S. dollars. Digital assets do not count, and neither does stock, which is not cash. The donor designates the gift as a §25F contribution to the SGO at the time of the gift, may designate only part of it, and cannot undo the designation. The value of anything received in return is subtracted. The proposed rule adds that a partner’s share of a partnership’s gift, or a shareholder’s share of an S corporation’s gift, is not a qualified contribution, so the gift has to come from the individual directly. The credit is for U.S. citizens and residents.

The credit applies against both regular income tax and the alternative minimum tax. It is nonrefundable and limited to tax liability after certain other nonrefundable credits; unused credit carries forward up to five years, oldest first, and carryforwards are used before the current year’s credit. The credited portion of a gift cannot also be deducted as a charitable contribution, but the rest can be if it meets the normal section 170 rules (the $300 above $1,700 on a $2,000 gift, for example).

Donors can give to an SGO in any covered state, wherever they live, including donors in states that did not opt in. And a donor may rely on an organization being on the IRS SGO list (and not shown as removed) at the time of the gift, unless the donor knew it did not qualify or was involved in whatever got it removed. The donor-side detail is in the federal tax credit explained and giving across state lines.

Donor numbers, acknowledgments, and Form 8525

The donor-number system is in the binding temporary regulations. The SGO registers in the IRS SGO portal, which supplies the uniform format for unique donor numbers. By January 31 of the following year, the SGO sends each donor a written acknowledgment with its EIN, the year’s designated total, the donor number, and whether any goods or services were provided (with a description and good-faith value if so); it can go electronically if the donor consents. By February 28 it reports each donor’s name, address, and total to the IRS through the portal. The donor never gives the SGO a Social Security number.

The donor then claims the credit on Form 8525, Federal Scholarship Tax Credit, listing each SGO’s donor number. Under the proposed rule, a donor who leaves one off is presumed not to have made a qualified contribution to that SGO, a presumption the SGO’s acknowledgment can rebut. The IRS has not released Form 8525 or its instructions yet. More in the donor number explainer and our Form 8525 story.

For families: who qualifies, four ways to verify

A scholarship may go only to an eligible student: one whose household income, for the calendar year before the application, is no more than 300% of area median gross income, and who is eligible to enroll in a public elementary or secondary school. The student does not have to be enrolled anywhere when applying; Treasury’s own example is a student who gets a scholarship in the summer for expenses tied to enrolling later that year.

The proposed rule follows the Section 8 housing method, adjusted for family size. The household is the student and everyone living with the student; in shared custody it is the home where the student lives longest during the year (on a tie, the higher-income home). Income follows the HUD definition but ignores the imputed return on net assets, such as unrealized appreciation in a home or stock; it includes child support and alimony that are not taxable income, and excludes non-cash receipts. The IRS will publish the area figures each year; it has not published them yet. Treasury estimates that roughly 96% of children in participating states would be eligible under these rules and safe harbors. SGOs verify one of four ways:

• Direct verification: pay stubs, prior-year federal or state returns, IRS transcripts, Forms W-2, evidence of other income such as untaxed child support (or a certification that there is none), or “other relevant data sources.”
• Categorical eligibility: an award letter from the last 12 months showing a household member currently receives SNAP, TANF, WIC, Section 8 housing, or SSI. Only those five. School-wide free or reduced-price lunch does not count, because the statute tests each household. Treasury asks for comments on adding state or tribal programs.
• Low-income-area tutoring and special-needs safe harbor: scholarships for individual academic tutoring, or special-needs services for a special-needs student, where the school picks the students based on need and the school is in a HUD qualified census tract or certifies that at least 80% of its students live in one. The SGO must get an annual third-party audit (school eligibility, need-based selection, qualified providers, need diagnosed by a professional independent of the provider, and quality and impact) and give it to the state.
• Foster-child safe harbor: foster children meet the income test with no separate verification.

An SGO may set a lower income limit of its own or narrow its focus, for example to particular subjects. Priority runs to renewing students, then their siblings, with flexibility by award type: it matters most for tuition, while a tutoring or special-needs award can be prioritized by need. More on the mechanics in income verification for SGOs, scholarship eligibility, and our story on the income rules.

For families: schools, expenses, and residence

A scholarship funds students “solely within the State” based on where the student lives under state law, not where the school is or where purchases are made. In Treasury’s example, an SGO listed only in State X can fund a student who lives in State X and attends school in State Y, but not a student who lives and attends school in State Y. Dependents of members of the Armed Forces and of individuals residing on Indian Lands get exceptions that treat them as within two states.

The proposed rule defines “school” by reference to section 530(b)(3)(B): a school providing K-12 education as determined under state law. Qualified expenses are those in section 530(b)(3)(A) and the guidance under it. Treasury says separate section 530 guidance on qualified expenses and schools is “a high priority” and will come “as soon as possible”; it is not out yet. Treasury’s announcement lists private-school tuition, academic tutoring, special-needs services, books, supplies, and computers and other equipment among the expenses scholarships can support. Homeschool eligibility is still open: the June preview said a home school treated as a school under state law would count, but the proposed rule does not restate that and leaves it to the section 530 guidance. See homeschool eligibility by state and qualified expenses.

Money moves under set rules. Tuition, fees, room and board, and similar school charges are paid directly to the school. Other vendors may be paid directly if the SGO has verified them and they are not related to the family. A family receives money only as a reimbursement backed by a receipt showing the payment and that the expense qualifies. A qualified digital wallet, a third-party platform that pays approved vendors or requires timely receipts, is also an approved channel. And a state may not limit the kinds of schools students attend or the kinds of qualified expenses a scholarship covers. Children and relatives of an SGO’s board members, officers, selection-committee members, and substantial contributors cannot receive its scholarships (details under disqualified persons).

For SGOs: the 90% test and the 85% safe harbor

§25F(d)(1)(B) requires an SGO to spend at least 90% of “the income of the organization” on scholarships. The proposed rule defines income as “the total gross receipts of the organization from all sources,” on the cash method and “unreduced by any expenses.” Then comes the safe harbor: if at least 85% of a single-State SGO’s activities are scholarship granting (under §25F, a state tax-credit program, or any other scholarship program, counting administration, fundraising, governance, investment, compliance, and outreach to the extent they support it), it applies the 90% test and the other operational requirements to its §25F segregated account, meaning the qualified contributions and their earnings, instead of the whole organization. The 85% activity test is separate from the 90% spending test. Treasury asks for comments on how to measure activities and whether 85% is the right line, and estimates the safe harbor could bring in about 450 more organizations.

Every designated gift must go into the segregated account, whether or not the donor ends up claiming a credit. Timing is generous: each year’s income must be spent by the end of the following taxable year, so a first-year SGO has until the end of year two. Spending counts when paid, so a multi-year award counts in each year a payment goes out; spending is applied to the oldest year’s income first; a refund from a school or vendor is new income in the year it comes back; and money moved to a qualified digital wallet counts on transfer if the SGO does not keep ownership.

An organization below 85% gets no safe harbor, so the 90% test applies to everything it takes in. Treasury acknowledges the rule “may require the formation of new organizations,” and lets a state list an organization whose 501(c)(3) application is still pending if the exemption will be effective by January 1 of the list year. Full compliance detail: our 90/10 compliance guide, retrofitting an existing nonprofit, and the 85% safe harbor explained.

For SGOs: “located in” and multistate SGOs

This definition is in the binding temporary regulations: an SGO is located in a state if it is authorized to do business there and complies with the state’s generally applicable charitable-organization rules, including transparency, accountability, and fraud prevention. No headquarters or in-state staff is required.

An SGO may appear on more than one state’s list. Under the proposed rules a multistate SGO must be at least 85% scholarship granting (it has no option to apply the 90% test to the whole organization), keep a separate §25F account for each state, let donors choose how their gift is split among those states, deposit gifts as designated, and meet the operational requirements, including the 90% test, separately for each account. A multistate SGO removed by one state stays on the IRS list for the others if it still qualifies there. What a state may and may not demand of any SGO is covered in the states section.

For SGOs: payments, conflicts, certification, audits

The SGO definition restates the statute: a 501(c)(3) public charity (not a private foundation) with a §25F segregated account, on the list of at least one covered state where it is located, that funds 10 or more students who do not all attend the same school, verifies expenses and eligibility, serves students solely within the state, gives renewal and then sibling priority, and does not earmark gifts for a particular student. Every SGO also needs systems that stop duplicate awards for the same expense, and it must follow the payment rules described above: school charges to the school, verified unrelated vendors, receipts for reimbursements, or a qualified digital wallet. See four ways to pay scholarship money.

Disqualified persons. No scholarship may go to an officer, director, or trustee (or anyone with similar powers), anyone who helps select recipients or set awards (including committee members, paid or not), a substantial contributor, or a family member of any of them. There is no exception for blind or anonymized selection. A substantial contributor gave more than $5,000 in the SGO’s taxable year, if that is more than 2% of the contributions received that year, tested for the whole organization and for the §25F account, with a spouse’s gifts combined. In Treasury’s examples, a $6,000 gift that ends the year at 1.33% of contributions does not make the donor a substantial contributor, while a $6,000 gift at 2.14% does, for that year and the next. Officers and selectors stay disqualified through the end of the year after they leave. Details in the disqualified-person rules.

Certification and audit. Each year an SGO certifies that it met every requirement and reports applications, awards, the high, low, and average award, the number of schools, spending by expense category, its income, and the share spent for the prior and current year. The certification is attached to the Form 990 (an SGO that does not file one submits it by the 15th day of the fifth month after its year ends), with a copy to each listing state. Every SGO also needs an annual financial and programmatic audit, with results given to each state that lists it. Above $500,000 in total receipts (all receipts, not only the §25F account), the auditor must be an external, independent professional or accredited body; at $500,000 or less, a committee of independent persons unrelated to management may do it, signed under penalties of perjury. The audit covers how the SGO finds and verifies applicants, selects recipients, sets award amounts, pays and verifies expenses, stays located in the state, and meets the operational requirements. See the audit and certification rules.

The IRS portals

There are two, and both are in the binding temporary regulations. SGOs use the IRS SGO portal to register, get the donor-number format, report contributions, and authorize their listing on the public IRS SGO list. Every organization that plans to solicit qualified contributions must register “as soon as possible and preferably before” it appears on any state list, giving its name, EIN, address, phone, year of formation, a contact person, and its taxable year. Until it registers, it cannot issue compliant donor acknowledgments, and Treasury describes registration as something completed before January 1, 2027.

States use the IRS State section 25F portal for elections, SGO lists, changes, and certifications. Neither portal was open as of October 1, 2026, and the IRS says it is considering temporary alternative procedures so every state that wants to participate in the first year can register or otherwise file its election and list. Plan to run your own records first and connect as the portals open.

For states: elections, lists, and limits

The state-side rules are all in the binding temporary regulations. A state registers in the IRS State section 25F portal with a special-purpose EIN, and the governor (or whoever state law designates) may authorize up to two designated officials. Elections are made one calendar year at a time, and a completed election cannot be revoked.

• For 2027: an advance election on Form 15714 by January 1, 2027, perfected by submitting the SGO list by February 15, 2027. A first-year state cannot elect just by sending a list. If the list does not arrive in time, “no organization in that State would qualify as an SGO for the calendar year.” The IRS will publish the states that have made advance elections.
• Later years: an advance election between January 2 and September 30 of the prior year, perfected by a list submitted October 1 to January 1; a state that has elected before may instead elect by submitting its list in that window. “On or before January 1” runs to 11:59 p.m. that day, to accommodate a newly inaugurated governor. A state electing for the first time after 2027 follows future guidance.
• The list: the state certifies it includes every organization located in the state that seeks inclusion and meets the requirements; there are no discretionary exclusions. It may add or replace entries until the deadline; later additions wait for the next year. Removal requires a procedure with due process, an SGO that asks to come off must be removed, and the IRS must be told. Any public state list must match the submitted list and link to the IRS SGO list (the proposed version adds a statement that donors may rely on the IRS list).
• New and pending organizations: for an organization with no track record, a state may rely on governing documents and written policies, but only after finding that they expressly require the federal operational rules and show the ability and intent to comply. A state may list organizations with pending 501(c)(3) applications only if it lists every pending applicant that seeks inclusion, marks them pending, and certifies the exemption, if granted, will be effective by January 1 of the list year.
• No extra rules: a state must require SGOs to follow its general charity laws and must require applications, documentation, and financial reports reasonably tailored to the federal tests and to preventing fraud, including duplicate awards. But it “may not require SGOs to operate in a manner that is more restrictive than the requirements set forth in section 25F(c)(5), such as by limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses for which scholarship funds may be used.” State procedures are subject to federal review, and after a pattern of irregularities the IRS may require changes.

Under the proposed rules, states also receive each listed SGO’s annual audit and certification, and the separate audit for the tutoring and special-needs safe harbor. Treasury counted 30 states with elections as of August 2026; see the state-by-state status map, how states opt in, and one national standard for SGOs.

What changed from the June preview

On June 9, 2026, Deputy Assistant Secretary Kevin Salinger previewed the rules and said Treasury intended the proposal to be consistent with the preview, subject to legal review. Most of the architecture carried through: the segregated-account safe harbor, the “located in” definition, per-state accounts for multistate SGOs, the foster-child safe harbor, annual audits, and donor numbers with no Social Security numbers. The preview said Treasury expected to issue proposed rules by the end of September; they were filed October 1, alongside binding temporary regulations the preview did not mention. Here is what moved:

The rules also settle questions the preview never raised: the $3,400 joint-return reading, the state-credit ordering rule, credit against the alternative minimum tax, the bar on partnership and S corporation gifts, the exclusion of digital assets, the residence test for students, the disqualified-person limits, the payment rules, the two-year spending window, and the 2027 state deadlines. On expenses, the preview said section 530 guidance would follow as a separate workstream and that Treasury intends scholarships to support tutoring and special-needs services; that guidance is still separate, and still to come. The preview itself is archived in full.

What’s still open

• Qualified expenses and “school” under section 530, in separate guidance Treasury calls a high priority, including homeschool, microschool, tutoring-provider, and extended-day questions. Treasury’s announcement lists tuition, tutoring, special-needs services, books, supplies, and computers among expenses scholarships can support.
• Form 8525 and its instructions, the uniform donor-number format, and the yearly area income figures, none released yet.
• Portal opening dates for SGOs and states, and any first-year alternative procedures for states.
• Final regulations, after the December 1 comment deadline and December 15 hearing, on no announced schedule. Treasury asks for comments on, among other things, how to measure the 85% activity test, whether 85% is the right threshold, and whether to add state or tribal programs to categorical eligibility.
• Gifts with no state named to a multistate SGO. The rule requires SGOs to let donors designate a state and to deposit as designated, but does not address an undesignated gift.
• Other giving channels. Donor-advised fund grants, IRA charitable distributions, employer matches, and gifts from trusts or estates are not addressed. Nor is paycheck withholding, though after-tax payroll deduction counts as cash.
• Which other states join for 2027, up to the January 1, 2027 advance-election deadline.

What to do before January 1

For anyone forming or running an SGO, the rules convert to a checklist:

• Check the 85% activity test. If scholarship granting is under 85% of what your organization does, consider a dedicated SGO. A new organization aiming at a 2027 list as a pending applicant should be formed by January 1, 2027 and file its exemption application on time, because the exemption must be effective by that date.
• Open a segregated §25F account, one per state you plan to serve, and route every designated gift into it.
• Register in the IRS SGO portal as soon as it opens, ideally before your state submits its list.
• Build donor acknowledgments as a system: donor numbers, the January 31 acknowledgment, and the February 28 IRS report.
• Write the policies a state will read: governing documents and procedures that expressly require the operational rules, a disqualified-person screen, duplicate-award checks, and the payment rules.
• Design income verification around the four routes, and budget for the annual audit.
• Confirm “located in” status in each target state and apply to its list well before the February 15, 2027 deadline.
• Comment by December 1 if a provision would not work for your organization.

Donors: give on or after January 1, 2027 (2026 gifts do not count), designate the gift when you make it, and if you are married, each spouse should make and designate a gift. Families: apply to an SGO listed by the state where the student lives, with last year’s income records or a current benefit award letter. States: file Form 15714 by January 1, 2027 and the list by February 15, 2027, and keep application rules within the federal limits. Builders can start with the free SGO builder and how to start an SGO.

Read the summaries of the proposed regulations and the temporary regulations, and follow the news feed for the comment period and final rules.

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