In July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. Most of the items in this bill were tweaks to existing tax rules and laws. What flew under the radar a bit was a new tax credit slipped into the bill that begins on January 1, 2027, known as the Education Freedom Tax Credit (also called the Federal Scholarship Tax Credit, or Section 25F). This is a federal tax credit for giving to K-12 scholarship granting organizations (SGOs). The credit is permanent law with no expiration date.

This is the first time the federal government has singled out one category of charitable giving for special treatment.

If you want the TLDR (too long didn't read) version, check out the image below:

How it works

You receive a dollar-for-dollar federal tax credit of up to $1,700 ($3,400 if married) for donating to a qualifying nonprofit that gives scholarships to eligible children (an SGO). I often see confusion between tax "credits" and tax "deductions". A tax credit reduces your tax bill dollar-for-dollar, so if you donate $1,700 you will pay $1,700 less in federal taxes (as long as you have $1,700 or more in total federal tax liability during a given year). A tax deduction allows you to offset some of your income with a deduction. If you're in the 24% bracket, a $1,700 contribution saves you about $408 in taxes.

A contribution claimed for the credit cannot also be deducted as a charitable gift. There is no double dipping.

This is a nonrefundable tax credit, but unused credits can carry forward for up to 5 years. Contributions to the SGO must be made in cash.

As a donor, you cannot direct your contributions to a specific student.

Who gets the scholarships?

Eligible students are K-12 students from households at or below 300% of their area median gross income. Estimates show that over 91% of children in the US could qualify.

At least 90% of income from qualified contributions must be spent on student scholarships.

What can the scholarship money be used for?

This is not just a private school tuition program. The law borrows its list of eligible expenses from the Coverdell education savings account rules (Section 530(b)(3)(A)), which explicitly covers students at public, private, and religious schools.

Public school students can use scholarships for:

• Academic tutoring. The Treasury's fact sheet specifically mentions tutoring for students at their local public school.
• Special needs services, including therapy and tutoring providers paid directly by the SGO.
• Books, supplies, equipment, and school fees.
• Computers, software, and internet access.
• Transportation, uniforms, and extended-day programs required or provided by the school.
• Tuition to attend a public school outside their home district.

Private and religious school students can use scholarships for:

• Full or partial tuition and fees.
• Room and board, where the school charges it.
• Uniforms and transportation required or provided by the school.
• Books, supplies, equipment, and technology.
• Tutoring and special needs services on top of the school's own program.

A few things to know:

• Scholarships pay for specific expenses for individual students. They cannot be used as general operating money for a school or district.
• Each SGO decides which expenses it funds. Some may only fund tuition, while others use the full list.
• Whether homeschool costs qualify is still unresolved.
• A student's scholarship is not capped at $1,700. That limit only applies to the donor's credit.
• Scholarships are not taxable income to the family.

State participation

If your state has not opted in, then you cannot donate to an SGO in your state. However, you can still receive the credit even if your state has not opted in, by donating to an SGO in a state that has opted in. For example, if Illinois chooses not to opt in but Missouri does, you can donate to an SGO in Missouri and receive the tax credit on your federal return.

As of November 10th, 32 states have opted in. Notably, Illinois has not decided yet. Each state has until January 1, 2027 to decide.

The argument against opting in is that this is viewed as a school voucher program and would redirect resources away from public schools, as they may lose more students to private schools and public school funding is usually tied to enrollment.

The argument for opting in is that people can donate and receive the credit either way, and a state refusing to opt in is just letting money flow out of state to SGOs elsewhere.

Should you do it?

If you pay more than $1,700 ($3,400 if married) in federal taxes, this is close to a no-cost way to direct part of your tax bill to a scholarship granting organization of your choice. You're not getting extra money. You're choosing where $1,700 of taxes you'd owe anyway ends up.

It may not be a fit if:

• Your federal tax bill is low, like a retiree living mostly on Roth or Social Security income. Unused credits carry forward five years, but a credit you can't use doesn't help.

How to do it:

1. Starting January 1, 2027, find an SGO on the IRS SGO list. Lists depend on which states opt in, so they won't be complete until early 2027.
2. Give cash and designate the gift as a qualified contribution when you make it. That designation can't be changed later.
3. If you're married and want the full $3,400, each spouse needs to make their own gift.
4. The SGO will send you an acknowledgment with a donor number by January 31, and you'll claim the credit on Form 8525.

What could still change:

These rules come from Treasury's proposed regulations, so details could shift before they're final.

If you're a client, we'll talk about whether this makes sense for you in your 2027 tax planning.