The CPA's guide to the §25F Education Freedom Tax Credit: advising clients on the federal scholarship credit

This guide exists because a CPA asked us for it: a single page to work from when clients start asking about the new federal scholarship credit. Every mechanical claim below cites the enacted statute (IRC §25F, added by Public Law 119-21, §70411, enacted July 4, 2025) or the regulations Treasury released October 1, 2026, by paragraph, and where Treasury has not spoken we say so instead of guessing. For the client-facing version of the same material, see the credit explained for donors; for program background, what is ECCA / the EFTC.

The one-pager

The reference table. Everything here traces to the statutory text or, where noted, to the proposed and temporary regulations Treasury released October 1, 2026.

Proposed vs. temporary: what binds

Treasury released two documents on October 1, 2026 (published in the Federal Register October 2), and they carry different weight. Cite them accordingly in workpapers.

• Temporary regulations (T.D. 10057). Binding without a prior comment period. They are effective 60 days after publication, apply by their terms on or after September 1, 2026, and expire October 1, 2029. They cover only the pieces needed to launch on January 1, 2027: definitions in §1.25F-1T (including “qualified contribution,” “cash,” and “located in a State”), SGO registration in the IRS SGO portal and the donor acknowledgment and IRS reporting rules in §1.25F-4T(b) and (c), and state elections and SGO lists in §1.25F-5T. Summary at T.D. 10057.
• Proposed regulations (REG-117199-25). Not final. Proposed §§1.25F-1 through 1.25F-5 repeat the temporary text and add the rest, including the credit computation in §1.25F-2 and the SGO rules in §1.25F-3 and §1.25F-4(d) and (e). They would apply to taxable years ending on or after the date final regulations are published. Until then, 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 applicable to each “in their entirety and in a consistent manner.” Comments are due December 1, 2026, and a public hearing is scheduled for December 15, 2026. Summary at the proposed regulations.

The practical consequence: every client-favorable credit rule in this guide that rests on prop. §1.25F-2 (two caps on a joint return, the state credit coming off before the cap, the ordering rule for mixed gifts) is a reliance position, not final law. Reliance requires following the applicable portions in their entirety, so a client taking the two-cap position should follow the rest of the proposed credit rules as written, including the Form 8525 donor-number requirement. Final regulations could change any proposed rule.

Core mechanics

§25F(a) allows an individual who is a U.S. citizen or resident a credit against chapter 1 tax equal to the aggregate qualified contributions made during the taxable year. §25F(b)(1) caps the credit at $1,700 “to any taxpayer for any taxable year.” A qualified contribution under §25F(c)(3) is “a charitable contribution of cash to a scholarship granting organization” that uses it to fund scholarships for eligible students within the state where the organization is listed.

The proposed regulations turn that into a formula. Under Prop. Treas. Reg. §1.25F-2(c)(1), the credit is the lesser of (i) the aggregate qualified contributions made during the year while the taxpayer was a U.S. citizen or resident, reduced (but not below zero) by any state credits for those contributions, or (ii) $1,700. A resident is a resident under §7701(b) or by a §6013(g) or (h) election, and “United States” means the 50 states and the District of Columbia (Prop. §1.25F-1(a)(15)), so a part-year resident counts only the gifts made during the resident portion of the year. A qualified contribution is a cash gift by an individual that the donor designates to the SGO, at the time of the gift, as a §25F contribution; the designation is irrevocable, the donor may designate only part of a gift, and the value of any goods or services received comes off (Temp. Treas. Reg. §1.25F-1T(a)(12)).

Note what the statute does not do. There is no income phaseout, no AGI floor, and no requirement that the donor live in a participating state. The proposed regulations say so directly: a taxpayer “may make a qualified contribution to any SGO on any State SGO list, regardless of the taxpayer’s State of residence” (Prop. Treas. Reg. §1.25F-2(a)(1)), so a client in a non-participating state can donate to a listed SGO in a participating state and still claim it. There is also no entity path. The credit sits in subpart A (nonrefundable personal credits) and is allowed only to individuals, so a client asking whether their S corporation or partnership can generate the credit at the entity level gets a clean no. The proposed regulations add that a partner’s distributive share, or an S corporation shareholder’s pro rata share, of the entity’s gift to an SGO does not count toward the individual’s credit either, whether or not that share is deductible under §170 (Prop. Treas. Reg. §1.25F-2(a)(3)). Owners who want the credit give personally.

On the receiving side, briefly, since clients with school-age kids will ask: scholarships go to students in households at or below 300% of area median gross income (as used in §42), measured for the calendar year before the scholarship application, and cover expenses described in §530(b)(3)(A), the Coverdell expense list. The proposed rules measure area median gross income with HUD’s Section 8 methodology, adjusted for family size, with figures the IRS will publish annually (Prop. §1.25F-1(a)(4)). The detailed expense list and the meaning of “school” await separate §530 guidance, which Treasury says it will issue as soon as possible and which has not been released. Details in scholarship eligibility. One firewall to flag early: a client cannot fund their own child’s scholarship. §25F(d)(1)(E) bars an SGO from earmarking contributions for any particular student. Large donors face a second limit: under Prop. Treas. Reg. §1.25F-3(d), a person who gives an SGO more than $5,000 in its taxable year, if that is more than 2% of the contributions it received that year (tested for the whole organization and for its §25F account, with a spouse’s gifts combined), is a substantial contributor. Substantial contributors and their family members are disqualified persons who cannot receive that SGO’s scholarships for that year and the next, subject to a narrow exception for an award made before the donor crossed the line. In Treasury’s substantial-contributor example, a $6,000 gift is 1.33% of the SGO’s $450,000 year, so it does not trigger the rule.

Why it beats the §170 deduction

For most clients the practical pitch is simple. Since the standard deduction roughly doubled, most filers have gotten little or no tax benefit from charitable giving; OBBBA’s non-itemizer deduction, starting with 2026, is capped at $1,000 of cash gifts to public charities ($2,000 on a joint return) and is worth that amount times the client’s bracket. §25F is a credit, claimed regardless of whether the client itemizes, so a standard-deduction client who gives $1,700 in cash to a qualifying SGO sees their federal tax fall by $1,700. Compare the itemizer’s alternative: a $1,700 deduction in the 24% bracket is worth $408. The credit is worth the full $1,700 at any bracket, to itemizers and non-itemizers alike.

The split happens at the time of the gift, because the donor designates to the SGO how much of a contribution is a §25F qualified contribution, and may designate only part of it (Treasury’s Example 4 designates $1,700 of a $4,000 gift). That makes the planning easy: at any positive marginal rate the credit dominates the deduction, so the credited slice should be the first $1,700 unless the state-credit interaction below changes the math.

The state-credit haircut (§25F(b)(2))

This is the interaction most likely to surprise practitioners in states with their own scholarship tax credit programs. §25F(b)(2) reduces the federal credit “by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year.” A state scholarship credit claimed for the same gift reduces the federal credit.

Treasury’s proposed regulations settle the ordering in the client’s favor: the state credit is subtracted from the qualified contributions first, and the $1,700 cap applies to what remains (Prop. Treas. Reg. §1.25F-2(c)(1)). The preamble’s illustration is a $2,500 qualified contribution that earns a $500 state credit: $2,500 less $500 leaves $2,000, so the federal credit is the full $1,700, not the $1,200 a cap-first reading would produce. The reduction still bites when the net falls below the cap: in Example 3, $2,000 of designated gifts with a $400 state credit leaves $1,600, so the federal credit is $1,600. Treasury describes the reduction as a guard against combined federal and state benefits exceeding the contribution, not as a limit meant to shrink the credit for donors in states that already offer their own.

Three details matter in practice. First, the definition of a state credit (Prop. §1.25F-1(a)(22)) treats any state credit carryforward or carryback from the contribution as allowed in the year of the gift, whether or not the state return is joint, so deferring the state credit does not avoid the haircut. Second, where a state credit covers a single contribution that is partly designated under §25F and partly not, the credit is treated as allowed first from the undesignated dollars (§1.25F-2(c)(2)). In Example 4 a donor gives $4,000, designates $1,700, and claims a $400 state credit on the whole gift; the $400 is absorbed by the $2,300 undesignated portion and the federal credit is the full $1,700. Third, a state deduction, as opposed to a credit, does not reduce the federal credit at all.

So three structures work. Separate gifts: one contribution to a federally listed SGO claimed under §25F, and a separate contribution to the state-program organization claimed on the state return. A single gift to an organization that qualifies under both programs, sized so it still exceeds $1,700 after the state credit comes off. Or a single larger gift with only $1,700 designated, so the ordering rule puts the state credit on the undesignated dollars. In every case the combined state and federal benefit cannot exceed the gift itself. How the federal and state programs compare, and where they overlap, is covered in EFTC vs. state scholarship tax credits.

Nonrefundability and the carryforward

§25F is a nonrefundable personal credit subject to the §26(a) limitation: it can take the client’s liability to zero, not below. The proposed regulations allow it against the tax imposed by both §1 and §55(a) (Prop. Treas. Reg. §1.25F-2(a)(1)), so AMT does not block it. Under §1.25F-2(d), the ceiling is the §26(a) tax liability after the nonrefundable personal credits that cannot be carried forward, which the proposal lists as §§21, 22, 24, 25, 25A, 25B, 25C, and 25E. Those come first; §25F absorbs what liability is left.

Unused credit does not vanish. Under §25F(f)(1), credit exceeding the §26(a) limitation (reduced by the other subpart A credits, other than §25F itself, §23, and §25D) carries to the succeeding taxable year and is added to that year’s §25F credit. §25F(f)(2) sets the outer bound: no carryforward past the fifth taxable year after the year the credit arose, with credits treated as used first-in first-out. There is no carryback. Prop. §1.25F-2(e)(3) spells out that carried-forward credit is used before the current year’s credit, and Example 5 walks a six-year history: in 2033 the 2027 carryforward has expired, and $4,500 of carryforwards from 2028 through 2031 are used in a single year. The $1,700 cap limits each year’s new credit, not how much accumulated carryforward a later year can absorb. What carries forward is unused credit; contributions above the cap never carry forward (in Example 5, a $2,000 gift in 2032 generates $1,700 of credit, not $2,000).

Practically: a low-liability client (a retiree with $1,200 of tax, say) who gives $1,700 uses $1,200 in year one and carries $500 forward. As long as the client owes at least $500 of federal tax in total over the next five years, none of the credit is lost. The FIFO rule matters for clients who give annually while carrying balances, since the oldest credit absorbs first.

The married-filing-jointly question

Two practical points. First, each spouse makes and designates their own qualified contribution: in Treasury’s Example 2, each spouse gives $2,000 and each gift supports a $1,700 credit, and the $3,400 is then subject to the couple’s combined §26(a) limitation, with any excess carried forward; the remaining $600 may be deductible under §170. The proposal does not say how a single gift from a joint account would be divided between spouses, so the safe practice, and the fact pattern in the example, is two gifts, each made and designated by one spouse and each covered by its own acknowledgment. (For the substantial-contributor test, by contrast, a spouse’s gifts are combined.) Second, the rule is proposed, not final. Treasury says taxpayers may rely on the proposed regulations for qualified contributions made on or after January 1, 2027, provided they follow the applicable portions in their entirety and consistently, so a couple can plan two $1,700 gifts for 2027 on that reliance. Comments are due December 1, 2026, and a public hearing is scheduled for December 15, 2026. Our news analysis of the joint-return rule covers Treasury’s reasoning in more depth, and our coverage of the October 2026 rules walks through the rest of the package.

What qualifies (and what doesn’t)

• Cash only. §25F(c)(3) defines a qualified contribution as a charitable contribution of cash. Under the temporary regulations (§1.25F-1T(a)(12)(iii)) that means currency, checks, money orders, electronic transfers (including credit and debit cards), after-tax payroll deduction, or similar methods, in U.S. dollars, and expressly not any digital asset. Appreciated securities, crypto, real estate, and in-kind gifts do not generate the credit (an earlier draft of the bill allowed stock; that was removed before enactment, and older articles describing stock donations are describing the dead draft). A client can still give appreciated stock to an SGO as a regular §170 contribution with the usual gain avoidance, just without a §25F credit.
• To a listed SGO. The recipient must be a §501(c)(3) public charity (not a private foundation) that meets the §25F(d) operating requirements and appears on the list its state submits to the IRS under §25F(g) for the applicable year. A gift to an education charity that is not on a state’s list is an ordinary §170 contribution, no credit.
• Designated when given. A gift is a qualified contribution only to the extent the donor designates it to the SGO as one at the time of the contribution, and under the temporary regulations that designation, once made, is irrevocable (§1.25F-1T(a)(12)(i)). The SGO must deposit every designated gift in its segregated §25F account, whether or not the donor ends up claiming the credit. For an SGO listed in more than one state, the donor also designates which state’s account the gift goes to.
• Not addressed. The regulations do not address grants from donor-advised funds, IRA qualified charitable distributions, employer matching gifts, or gifts from trusts and estates. None of them is a plain case of an individual giving cash and designating it at the time, but there is no rule either way, and we would not plan a client’s credit around any of them until Treasury speaks.
• No student earmarking. §25F(d)(1)(E) bars an SGO from earmarking contributions for any particular student, and a gift conditioned on a named student disqualifies the SGO itself. Treasury also points to the private benefit doctrine for organizations set up to benefit a small group of related people. Designating a particular school is a different question: the statutory ban is student-level only, the October 2026 regulations do not address school designation, and it is common in state programs. The full analysis is at designating gifts to schools.
• Timing. Only donations made on or after January 1, 2027 count. A gift in December 2026, however well intentioned, earns no §25F credit in any year.

Verifying the SGO

The credit hinges on the recipient’s status, so verification belongs in your workpapers. The chain runs through the state: under §25F(g), a participating state (the election is made by the governor or the official designated under state law, using IRS Form 15714 per Rev. Proc. 2026-6) submits its list of qualifying SGOs to the IRS by January 1 of each calendar year, or as early as practicable for the first year. An organization is an SGO for credit purposes only if it is on that submitted list for the applicable year. The temporary regulations set the first-year mechanics: a state must file its advance election by January 1, 2027 and perfect it by submitting its 2027 list by February 15, 2027, or no organization in that state qualifies for 2027 (Temp. §1.25F-5T(c)).

The working tool for practitioners is the IRS SGO list, which the IRS will publish on irs.gov, organized by covered state, for every listed SGO that authorizes disclosure. Under Prop. Treas. Reg. §1.25F-2(b), a donor may rely on an organization’s presence on that list (and not shown as removed) at the time of the gift to establish that it is an SGO. Reliance is lost only if the donor knew the organization did not qualify, or was at least partly responsible for, or aware of, the act or failure that led to its removal. Removed organizations stay on the list struck through, with the removal date, so, absent those exceptions, a later removal does not undo reliance for a gift made while the organization was listed. A state may also list an organization whose 501(c)(3) application is still pending, marked as pending; the IRS adds it to the IRS SGO list once exemption is recognized (effective by January 1 of the list year) and the organization authorizes disclosure (Temp. §1.25F-5T(d)(5), (d)(9)).

On participation counts, the two numbers that circulated through the first half of 2026 have now converged. The IRS’s official roster of states with completed advance elections stands at 30, and our state participation map counts the same 30 states. Kansas and Kentucky, which opted in by state action over gubernatorial vetoes, have both since filed the formal federal election, Kansas in early July 2026 and Kentucky later that month, and the roster caught up as each filed. Treasury’s own count in the October 1 release is also 30. New York has announced an intention to participate but has not filed; any state that has not filed has until January 1, 2027 to make the advance election for 2027. A handful of states have begun publishing SGO interest forms and notification signups, and the broader certification wave runs through February 15, 2027, the deadline for 2027 lists. As of October 1, 2026 the IRS SGO portal is not open and the IRS SGO list has not been published. Before advising on a specific gift in 2027, confirm the organization is on the IRS SGO list on the date of the gift and keep a dated record of that check. A gift made before the organization appears on the list does not have the benefit of the reliance rule.

Substantiation and the donor number

The temporary regulations Treasury issued October 1, 2026 (T.D. 10057) put the substantiation system in place, and it is unusual enough to brief clients on in advance. The SGO registers in an IRS SGO portal (§1.25F-4T(b)) and, by January 31 of the following year, issues the donor a written acknowledgment showing its EIN, the year’s total designated qualified contributions, whether any goods or services were provided (with a description and good-faith value), and a unique donor number created under the uniform format the IRS gives registered SGOs (§1.25F-4T(c)(1)). The acknowledgment can be electronic if the donor consents. By February 28 the SGO reports each donor number’s name, address, and annual total to the IRS through the portal (§1.25F-4T(c)(2)), and the donor reports the number on Form 8525 (Prop. §1.25F-2(g)(1)). Each SGO issues its own numbers, so a client who gives to two SGOs has two numbers to report. The IRS matches the two sides, W-2-style, and the donor never gives the SGO a Social Security number.

The donor-side consequence sits in Prop. §1.25F-2(g)(2): a taxpayer who leaves an SGO’s donor number off Form 8525 is presumed not to have made a qualified contribution to that SGO. The presumption is rebuttable with the SGO’s timely written acknowledgment showing the number, or other evidence satisfactory to the Commissioner of the amount contributed and the §25F designation, within the response time in the IRS’s written request. The full walkthrough is at the §25F donor number.

The client file for a §25F claim should hold:

1. The SGO’s written acknowledgment with the year’s designated total, the goods-or-services statement, and the unique donor number.
2. A record of the §25F designation made at the time of the gift (the gift form, pledge page, or email to the SGO).
3. Evidence the SGO was on the IRS SGO list (or its state’s §25F(g) list) on the date of the gift.
4. Proof of the cash payment (bank or payroll records), retained at least three years.
5. Any state credit claimed for the same gifts, since it reduces the federal credit.

The proposed regulations name the claiming form as Form 8525, Federal Scholarship Tax Credit (or successor form), attached to Form 1040, but the IRS has not yet released the form itself or its instructions, and the uniform donor-number format will come through the IRS SGO portal, which is not open yet. The first returns that can claim the credit are 2027 returns, filed in 2028.

Year-end planning pointers

• Nothing to do in 2026 except get ready. No gift before January 1, 2027 earns the credit. The 2026 move is identifying which SGO the client will use once state lists are in (2027 lists are due February 15, 2027) and the IRS SGO list is published.
• The credit follows the year of payment. A gift by December 31, 2027 lands on the 2027 return, filed in early 2028.
• Withholding and refunds are irrelevant to eligibility. A client who normally gets a refund still benefits fully; the credit reduces liability, and the refund simply grows. The only clients who cannot absorb the full credit in year one are those with under $1,700 of pre-credit liability, and the 5-year carryforward covers them. A client who wants the benefit in-year rather than at filing can adjust their Form W-4 to recover the credit across their paychecks.
• Sequence around state credits. In dual-program states, keep the federal and state gifts separate, size a single gift so it still exceeds $1,700 after the state credit comes off (the proposed rules apply the reduction before the cap), or designate only $1,700 of a larger gift so the ordering rule puts the state credit on the undesignated dollars (Example 4).
• Size the gift to the cap unless itemizing. For a standard-deduction client, dollars above $1,700 (per spouse, for married clients) get no federal tax benefit beyond the capped non-itemizer deduction ($1,000, or $2,000 joint). For an itemizer, the excess is an ordinary §170 deduction, so larger gifts still work, just at deduction value.
• Married clients: one gift per spouse. Under the proposed rules each spouse can give, designate, and claim up to $1,700. See the joint-filer discussion above.
• Business owners: give personally. A gift through the client’s partnership or S corporation does not flow through as a qualified contribution (Prop. §1.25F-2(a)(3)), and a C corporation cannot claim the credit at all.
• Clients with scholarship-age children. Gifts to one SGO above $5,000 a year (spouses combined) that also exceed 2% of its contributions make the client a substantial contributor, which bars the client’s children from that SGO’s scholarships for that year and the next. Credit-sized gifts of $1,700 per spouse stay under $5,000.

Frequently asked questions