TL;DR

  • The EFTC is a federal credit, residents can claim up to $1,700 each whether or not their state opts in, by giving to an SGO listed by any participating state.
  • But scholarships only reach students who live in states that opt in and list SGOs. Sit out, and your residents fund students elsewhere, and your own students can’t get a §25F scholarship even at a school across the state line.
  • If just 100,000 residents each claim the credit, $170M+ in donations leaves the state.
  • Opting in costs the state nothing in scholarship money: the credit is federally funded, with no state appropriation. The state’s job is administrative, one calendar year at a time. For 2027: Form 15714 by January 1, the SGO list by February 15.

Why the money leaves

The Education Freedom Tax Credit (§25F) is a federal credit, so residents can claim it whether or not their state participates. But scholarships only reach students who live in states that opt in and list Scholarship Granting Organizations (SGOs). Sit out, and your residents donate to organizations listed by participating states, near or far, sending the dollars, and the benefit, elsewhere.

It comes down to how the money moves. A donor gives to an SGO and claims the federal credit. That SGO awards scholarships to eligible families in a state that has opted in and submitted a list of qualifying SGOs to the IRS, an election made by the governor or whoever state law designates. No opt-in means no qualifying SGOs, and no in-state organizations to receive donations or fund local students.

Treasury’s proposed regulations (October 2026), which taxpayers, SGOs, and states may rely on for 2027, settle both halves. On the donor side, “a taxpayer may make a qualified contribution to any SGO on any State SGO list, regardless of the taxpayer’s State of residence.” On the student side, a scholarship follows where the student lives: an SGO may fund only students who reside, under state law, in a state whose list includes it. “Attending school in a State or purchasing goods or services in a State is not sufficient” to count a student as within that state. Treasury spells out the consequence: a student who lives in a state that hasn’t opted in but attends school in one that has can’t receive a §25F scholarship from an SGO in either state. The exceptions are narrow: dependents of members of the Armed Forces, and dependents of individuals residing on Indian Lands. More in give to any of 30 states, scholarships follow residence.

The math

The leakage adds up fast. One example: if just 100,000 residents each claim the $1,700 credit, $170M+ in donations leaves the state, funding students elsewhere instead of at home.

100,000 × $1,700 = $170,000,000 in donations that could have funded local scholarships, flowing out of state because there are no in-state SGOs to receive them.

What’s at stake

That loss compounds quickly. Treasury and the IRS estimate that by 2030, more than 11 million taxpayers could give nearly $26 billion a year to SGOs in participating states, funding as many as 2.2 million scholarships (estimates from Treasury’s October 2026 release, not a state-by-state forecast). Every dollar a resident of a non-participating state gives goes into that pool and funds students in some other state. When those dollars leave, the ripple is local:

  • Families miss out on K-12 scholarships for the kinds of expenses Treasury cites, such as private-school tuition, academic tutoring, special-needs services, books, supplies, and computers. (The detailed expense list awaits separate IRS guidance under §530.)
  • Schools, tutors, and service providers lose the enrollment and spending that scholarships would have supported.
  • Local economies lose the staff wages and vendor spending that follow the scholarship dollars.

Opting in costs the state nothing

Here is the part that makes opting out hard to justify: keeping those dollars at home doesn’t cost the state any scholarship money. The credit is federal, there is no state appropriation, and no state education dollars fund the scholarships. A participating state’s role is administrative. Under Treasury’s temporary regulations, which apply from September 1, 2026, it registers in an IRS State section 25F portal, makes its election one calendar year at a time, and submits a list that must include every organization located in the state that seeks inclusion and meets the federal requirements. It reviews applicants and their annual audits, removes an SGO only through a due-process procedure, and may not add conditions more restrictive than federal law. That is staff work, not new spending. For 2027, the advance election (Form 15714) is due by January 1, 2027 and the SGO list by February 15, 2027.

Opting in keeps the federal credit working locally: scholarships for families, donations flowing through in-state SGOs, and no added cost to the state budget. Thirty states had elected to participate in 2027 as of August 2026, by Treasury’s count. To see where your state stands and who decides, check the state-by-state status map.

Frequently asked questions

If my state opts out, can I still claim the EFTC credit?

Yes. The Education Freedom Tax Credit is a federal credit, so any eligible taxpayer can claim up to $1,700 (a married couple filing jointly, up to $3,400 when each spouse gives) regardless of whether their state participates. Treasury's proposed regulations say it directly: a taxpayer may give to any SGO on any state's SGO list, "regardless of the taxpayer's State of residence." The catch is where the scholarships go: you would donate to a Scholarship Granting Organization listed by a state that has opted in, so the scholarship benefits a student who lives there, not in your own state.

Why don't scholarships reach my state if it opts out?

Scholarships flow only through SGOs on a participating state's list, which the state (through its governor or whoever state law designates) submits to the IRS. And under Treasury's proposed regulations, an SGO can fund only students who reside in a state that lists it. If your state doesn't opt in, no organization there qualifies, and a student who lives in your state can't receive a §25F scholarship from any SGO, even one in a neighboring participating state where the student attends school. Treasury's narrow exceptions are for dependents of military members and of individuals residing on Indian Lands.

Does opting in cost the state money?

Not for scholarships. The credit is federal, there is no state appropriation, and no state education dollars fund the scholarships. A participating state's role is administrative: under Treasury's temporary regulations it registers in an IRS portal, makes its election, reviews the organizations that apply, certifies its list of every qualifying SGO that seeks inclusion, and runs a due-process procedure for removals. That is staff work, not new scholarship spending.

Can my state change its mind later?

Yes. An election covers one calendar year, so a state that sits out one year can participate in a future year, and a participating state can decline to renew. Once a state completes its election for a year, it can't revoke it for that year. For 2027, a state must file its advance election on Form 15714 by January 1, 2027 and submit its SGO list by February 15, 2027; a state that elects for the first time in a later year follows procedures the IRS has said it will issue. Every year a state waits, its residents' donations, and the scholarships they would fund, flow to other states instead.