New school choice tax credit is coming. States may not get much room to reshape it.

A new federal scholarship tax credit is supposed to launch in January 2027. But before that happens, Treasury and the IRS have to explain how the thing will actually work.

Last week, the Treasury Department previewed upcoming guidance for the Education Freedom Tax Credit, a new program created under the One Big Beautiful Bill Act. The credit is meant to encourage private donations to scholarship-granting organizations, often called SGOs, that help families pay for K-12 education costs.

The basic pitch is simple: taxpayers can receive a dollar-for-dollar federal tax credit of up to $1,700 when they make qualified contributions to eligible scholarship groups. Those groups can then use the money to award scholarships to students.

But the plumbing is where this gets interesting.

Treasury and the IRS expect to issue proposed regulations by the end of September. Treasury said states, scholarship-granting organizations, and taxpayers should be able to rely on those proposed rules for tax year 2027. That matters because the program is supposed to start in January, and everyone involved needs rules before money starts moving.

What the credit is meant to do

The new scholarship tax credit was added to Section 25F of the Internal Revenue Code. Its goal is to expand education options by encouraging private contributions to organizations that award K-12 scholarships.

Those scholarships may be used for private school tuition, home-school costs in some states, and certain public school student expenses. That can include tutoring, before- and after-school programs, technology, and uniforms.

This is where the program gets politically loaded.

Supporters see it as a major school choice win. Families get more options, donors get a tax credit, and scholarship groups get a new funding stream. Critics worry the program could redirect support away from public schools or limit state control over how scholarship money is used.

Either way, the federal tax code is now being used as the engine.

Governors have the first big decision

Before scholarship groups can give out awards in a state, that state’s governor has to decide whether to participate.

That gives governors a gatekeeping role. But it may not give them as much control as some states want.

Some Democratic governors have reportedly shown interest in placing extra conditions around the program. Those could include steering scholarship awards toward low-income students or public school students, or requiring participating schools to follow state academic, accountability, and nondiscrimination standards.

That would be a major policy fight hiding inside a tax credit.

Kevin Salinger, Treasury deputy assistant secretary for tax policy, signaled that the federal rules may limit how far states can go. During a recent roundtable, he said states may not impose SGO-specific requirements that are more restrictive than Section 25F’s requirements.

In plain English, Treasury appears to be saying states can choose whether to participate, but they may not be able to rewrite the program once they opt in.

That is the key tension to watch.

Who can receive scholarships

Students will be eligible for scholarships if their family income is 300% of their area’s median income or lower.

That sounds targeted, but it covers a wide range of families. In some high-income areas, the threshold can include households earning more than $500,000. In lower-income areas, the threshold can be closer to $114,000.

That means this is not designed as a tiny program for only the poorest families. It could reach a broad slice of students, depending on how many states participate and how many donors use the credit.

The size of the credit also matters. A $1,700 credit may not cover full private school tuition in many places. But it could still help build a large donor base for scholarship groups, especially if the credit is easy to claim and the IRS process is simple.

The 90% rule could shape how SGOs operate

Treasury is also working through rules for scholarship-granting organizations.

Under the law, SGOs must be nonprofits. They must award scholarships to at least 10 students who do not all attend the same school. They must verify student income eligibility. And they must spend 90% of their revenue on scholarships.

That last requirement is a big one.

Salinger said Treasury expects the proposed rules will generally measure the 90% spending requirement against the organization’s total receipts, without reducing that amount by expenses.

For organizations that mostly exist to give scholarships, Treasury may offer a safe harbor. Under that approach, the organization could measure income using money held in a Section 25F segregated account, including qualified contributions and earnings.

For multistate SGOs, that safe harbor would have to be satisfied separately for each state-specific account.

That may sound technical, but it matters for operations. Scholarship groups will need clean accounting, clear records, and systems that can separate money by state. For smaller groups, that could be a real administrative lift.

The IRS may build a portal

Salinger also said the proposed rules are expected to lead to an IRS portal to support SGO administration and reporting.

The goal is to create a user-friendly system for interactions between SGOs and the IRS. But the full tool may not be ready all at once. Some features could roll out in phases.

That is worth watching because the success of this credit depends on ease of use. If donors, scholarship groups, and states have to fight through confusing systems, the program will be harder to scale. If the portal works well, the credit could move from policy idea to active funding channel much faster.

This is one of those boring implementation details that can decide whether a program becomes real or just sits in the tax code looking nice.

Treasury says certainty is the goal

Treasury Secretary Scott Bessent said the department is focused on implementing the credit faithfully and effectively. He said Treasury wants to give certainty to states, scholarship groups, taxpayers, and families, while making the process easy to navigate.

That is the right promise. The hard part is execution.

A tax credit like this touches a lot of players: donors, parents, schools, nonprofits, governors, the IRS, state agencies, tax preparers, and software companies. If the rules are vague, each group will wait on the next one. If the rules are clear, the program has a better chance of launching without chaos.

The proposed regulations expected this fall will be the next major step.