What is the Education Freedom Tax Credit? The EFTC explained

What the credit actually does

The Education Freedom Tax Credit lets an individual taxpayer give cash to a qualifying K-12 scholarship granting organization and then subtract that gift, up to $1,700, directly from the federal income tax they owe. Because it is a credit rather than a deduction, the benefit does not depend on your tax bracket. A $1,700 gift reduces a $1,700 tax bill to zero, whether you earn $50,000 or $500,000. The $1,700 limit applies to each taxpayer: Treasury’s proposed regulations treat spouses filing jointly as separate taxpayers, so a couple in which each spouse gives can claim up to $3,400 on one return.

That structure is the whole point. Charitable deductions under §170 are worth more to high earners and little or nothing to the roughly nine in ten filers who take the standard deduction. A credit is worth the same to everyone who owes at least that much tax, which is why the program is designed to draw in ordinary donors rather than only wealthy ones.

The money does not go to a school. It goes to a scholarship granting organization, a 501(c)(3) charity (not a private foundation) that must spend at least 90% of its income on scholarships for eligible students. Under Treasury’s proposed regulations it has until the end of the year after the money comes in, and “income” means all of the organization’s gross receipts, unless at least 85% of its activities are scholarship granting, in which case it can apply the test to its separate §25F account instead. That organization then awards scholarships to eligible students who live in a state where it is listed, whose households must generally fall at or below 300% of area median gross income. Treasury estimates that about 95% of American children live in households under that limit.

The donor rules Treasury settled in October 2026

On October 1, 2026 Treasury and the IRS released proposed regulations and companion temporary regulations for the credit. The temporary rules (definitions, SGO registration, donor acknowledgments, IRS reporting and state procedures) are binding rules that take effect without a comment period and apply from September 1, 2026. The proposed rules are not final; comments are due December 1, 2026 and a public hearing is set for December 15. Treasury says taxpayers may rely on the proposed rules for contributions made on or after January 1, 2027, if they follow them in full and consistently. For a donor, this is what they settle:

• Couples. Each spouse has a separate $1,700 limit, so a joint return can claim up to $3,400 when each spouse makes and designates a gift (Treasury’s example: each gives $2,000, each gets $1,700). The rules do not say how a single gift from a joint account is split, so the safe course is two gifts, one per spouse.
• State credits. A state tax credit for the same gift is subtracted before the $1,700 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. A state deduction does not reduce the federal credit at all. How the ordering rule works.
• Cash only. Currency, check, money order, electronic transfer (including credit or debit card) and after-tax payroll deduction count, in U.S. dollars. Digital assets do not, and stock is not cash.
• Designate when you give. You must tell the SGO at the time of the gift that it is a §25F qualified contribution, and that designation cannot be revoked. You can designate part of a larger gift.
• Any participating state. You may give to an SGO on any participating state’s list, wherever you live. The IRS will publish those organizations, by state, on an IRS SGO list. Treasury advises checking it before you give, and a donor may generally rely on an organization being on that list at the time of the gift.
• Give as an individual. Your share of a gift made by a partnership or S corporation does not count, even if your share is deductible.
• Paperwork. The SGO sends a written acknowledgment by January 31 with a unique donor number (you do not give it your Social Security number), and you report that number on Form 8525 with your return. Leave the number off and the IRS presumes you made no qualified contribution to that SGO, unless you can show the acknowledgment.
• No double benefit. The credited amount cannot also be deducted under §170. Anything you give above the credited amount (the $300 on a $2,000 gift, for example) may still be deductible under the normal charitable rules.

Some pieces are still to come. Treasury has said it will issue separate guidance under §530 on which expenses qualify and what counts as a school, and calls that guidance a high priority. Form 8525 and its instructions, the IRS portals for SGOs and states, and the yearly area-income tables have not been released, and the final regulations could change any proposed rule. The rules also do not address gifts through donor-advised funds, IRA charitable distributions or employer matches. Our full read of the October 2026 rules.

Where the name comes from

“Education Freedom Tax Credit” does not appear in the enacted statute. It began as the name school-choice advocacy organizations used, including ACE Scholarships and the American Federation for Children, and it became the most common way the program was described in public conversation.

It is no longer only an advocacy name. On June 10, 2026 the U.S. Treasury Department titled its guidance announcement “Treasury Previews Education Freedom Tax Credit Guidance,” adopting EFTC in an official federal publication and describing “the launch of the Education Freedom Tax Credit in January 2027.” Virginia’s governor had used the name earlier still, in the first state opt-in announcement. Treasury’s October 1, 2026 release of the regulations used both names in one sentence, describing “the new Federal Scholarship Tax Credit under section 25F, commonly known as the Education Freedom Tax Credit.” The regulations themselves are titled “Federal Scholarship Tax Credit,” as is the IRS program page, so both names appear on official material. The June Treasury press release is archived here, and so is the October one.

The IRS calls the same program the Federal Scholarship Tax Credit. Congress passed it as the Educational Choice for Children Act. Tax professionals cite it as §25F, after the section of the Internal Revenue Code where it lives. If you are trying to work out whether two sources are describing the same thing, they almost certainly are, and the four names are mapped side by side here.

What it means for you

The same program lands very differently depending on where you sit.

• If you pay federal income tax: starting in 2027 you can redirect up to $1,700 of what you already owe toward K-12 scholarships instead ($3,400 for a married couple who each give). You do not need to itemize. Give cash to an SGO on any participating state’s list and designate the gift as a §25F contribution when you make it. You can also adjust your withholding rather than waiting for a refund.
• If you have school-age children: your household may qualify for a scholarship if your income for the prior calendar year is at or below 300% of area median gross income and you live in a participating state. The student’s state of residence is what counts, not where the school is. Eligibility and qualified expenses are covered here. Treasury’s own examples of covered expenses go well beyond tuition (tutoring, special-needs services, books, supplies, computers, extended day programs), though its detailed expense guidance under §530 has not been issued yet.
• If you run a school: scholarships follow students, not institutions, so the practical question is which scholarship organizations serve your families. Under the proposed regulations, an SGO pays tuition and fees directly to the school rather than to the family. What it means for private schools.
• If you are forming a scholarship organization: you are the layer this entire program runs through, and the compliance rules are specific. The temporary regulations require registration in an IRS SGO portal that has not opened yet, and a state’s 2027 SGO list is due to the IRS by February 15, 2027. The step-by-step guide to starting one and the 90% spending rule and compliance requirements.

Where the states stand

The credit is federal, but each state decides whether to submit a list of scholarship granting organizations to the IRS. That decision determines whether students in the state can receive credit-funded scholarships, not whether residents can claim the credit.

States elect one calendar year at a time. Under Treasury’s temporary regulations, which take effect without a comment period and apply from September 1, 2026, a state that wants to participate in 2027 must file an advance election on Form 15714 by January 1, 2027 and then submit its SGO list by February 15, 2027. A participating state must list every organization located in the state that asks to be included and meets the federal requirements, and it may not impose rules stricter than §25F, such as limits on the type of school a scholarship student may attend. The 2027 calendar, date by date.

As of 2026-10-01, our tracker counts 30 states and jurisdictions opted in, 1 committed, 14 still undecided, 2 vetoed and 4 declined. Treasury’s October 1, 2026 release put its own count at thirty states. The full state-by-state tracker explains each status, and the opt-in process itself is described here.

Five common misconceptions

• “It is a deduction, so it mostly helps wealthy donors.” It is a credit. Its value does not scale with your tax bracket, and you do not need to itemize to claim it.
• “My state opted out, so I cannot claim it.” The credit is federal, and you can give to an SGO in any participating state. Your state’s decision affects whether students in your state can be served, not your ability to claim.
• “A married couple shares one $1,700 cap.” Under Treasury’s proposed regulations, spouses filing jointly are separate taxpayers for the cap. If each spouse makes and designates a gift, the joint return can claim up to $3,400. How the joint-return rule works.
• “It only pays private-school tuition.” Qualified expenses are defined by reference to the Coverdell list at IRC §530(b)(3), which names tutoring, special-needs services, books, supplies, computer technology and extended day programs alongside tuition. Treasury’s October 2026 materials give the same kinds of examples, and Treasury has said separate §530 guidance on qualified expenses and schools is coming. That can include public-school students.
• “I can donate now and claim it.” The credit applies to taxable years ending after December 31, 2026. A gift made in 2026 may still be deductible under §170, but it does not earn this credit. The 2026-to-2027 transition is worth planning around.

Frequently asked questions