New federal rules put Education Freedom Tax Credit on track

The U.S. Treasury Department and Internal Revenue Service released long-awaited proposed regulations on October 1 governing the new Education Freedom Tax Credit, giving states, taxpayers, and scholarship organizations a detailed roadmap ahead of the program’s January 1, 2027, launch.

The new federal program provides taxpayers with a dollar-for-dollar, nonrefundable federal income tax credit of up to $1,700 for qualifying cash donations to approved Scholarship Granting Organizations, or SGOs.

One of the most significant clarifications involves married taxpayers. Treasury confirmed that married couples filing jointly may claim a combined credit of up to $3,400, effectively allowing each spouse to qualify for the $1,700 maximum. Unused credits may also be carried forward for up to five years.

That significantly expands the potential reach of the program.

By 2030, Treasury and the IRS estimate that 600 to 700 SGOs could participate, with more than 11 million taxpayers making nearly $26 billion in qualified contributions annually. Federal officials estimate those contributions could fund as many as 2.2 million scholarships each year.

Importantly, the $1,700 limit applies to the taxpayer's credit, not to the size of an individual student's scholarship.

Scholarship funds may be used for a broad range of qualified K-12 education expenses. Those include private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other qualifying expenses associated with a student's education. That means the program is not limited to students attending private schools; students remaining in public schools may also qualify for assistance with eligible educational expenses.

The regulations also provide important guidance for SGOs.

Generally, an SGO must be a qualified 501(c)(3) public charity, separately account for qualified contributions, and comply with federal scholarship, operational and reporting requirements. The proposed rules also establish a framework allowing qualifying organizations to operate across multiple participating states, potentially allowing experienced scholarship organizations to expand rather than requiring every state to build an entirely new scholarship infrastructure.

Treasury estimates its operational safe harbor could enable roughly 450 additional organizations to participate and generate as much as $3 billion in additional annual qualified contributions.

The regulations also clarify the role of states.

Participation remains voluntary. But states that elect to participate cannot use discretionary certification standards to exclude an organization that otherwise meets the federal requirements. The regulations are intended to prevent states from using the certification process to impose additional restrictions inconsistent with the federal program.

For the Mountain West, the new regulations move the program from concept toward implementation. Idaho, Montana and Wyoming have already elected to participate for 2027 and appear on the IRS's official list of participating states.

For the first program year, participating states must submit their advance election by January 1, 2027, and complete the process by submitting their lists of qualifying SGOs by February 15. If a state fails to submit its SGO list by that deadline, organizations in that state will not qualify as SGOs for the 2027 program year.

That puts Washington state on a much shorter clock. Governor Bob Ferguson has not yet announced whether Washington will participate. As recently as September, his office said he remained undecided.

The release of the federal regulations resolves many of the implementation questions that states had been waiting for Treasury to answer. Washington state now has roughly three months to decide whether to make an advance election for 2027 and, if it does, begin identifying organizations that could qualify as SGOs.

The choice has practical consequences for Washington families. If Washington participates, eligible students could receive privately funded scholarships for qualifying educational expenses ranging from tutoring and special-needs services to books, technology and private-school tuition.

If Washington does not participate for 2027, Washington students would not be eligible to receive scholarships through SGOs certified by the state that year, while students in Idaho, Montana, Wyoming and other participating states move forward with the program.

With the federal rules now on the table and the January 1 deadline approaching, Washington state's remaining question is no longer how the program will work. It is whether the Evergreen State will participate.

Taxpayers and students in Idaho, Montana and Wyoming are already set up to benefit from the new federal Education Freedom Tax credit.