A federal tax credit aims to expand school choice nationwide

The U.S. Departments of Education and Treasury has released new details about the Education Freedom Tax Credita centerpiece of President Trump’s Working Families Tax Cuts Act.

Administration officials describe it as the largest expansion of education choice yet, with the potential to direct billions of dollars to private scholarships and education services beyond traditional public school funding streams.

Unlike previous education tax credits that were aimed directly at families, this credit works by encouraging taxpayers to contribute to nonprofit Scholarship Granting Organizations (SGOs), which then distribute aid to eligible students.

The design is complex and a bit confusing, the rollout will take time, and its impact will vary widely by state. For families, the most important question is not whether the credit exists, but whether and how it will be available where they live.

How the Education Freedom Tax Credit works

At its core, the Education Freedom Tax Credit allows individuals to claim a federal tax credit of up to $1,700 for cash contributions to approved Scholarship Granting Organizations (SGOs). A tax credit reduces federal income taxes dollar for dollar, making it more valuable than a tax deduction that simply reduces taxable income.

These SGOs are nonprofit organizations that must use at least 90% of their resources for primary and secondary education scholarships. These grants can be applied to a wide range of education expenses related to public, private, or charter schools. Examples include private school education, tutoring services, classroom supplies, vocational training equipment, and support services for students with disabilities.

The program is structured as a three-step pipeline: states opt in, taxpayers contribute, and students receive scholarships. States that choose to participate must formally elect to become ‘covered states’ and publish an annual list of eligible SGOs. Taxpayers then donate to one of those organizations and claim the credit when they file their federal tax returns.

If a taxpayer cannot use the entire $1,700 credit in one year, any unused portion can be carried forward for up to five years. Any U.S. citizen or resident can claim the tax credit if he or she makes a qualifying cash contribution to a publicly traded SGO in a participating state. There are no income limits for donors.

Who can receive the grant?

To receive the grant, students must meet income and enrollment criteria. Eligible students must be eligible to enroll in a public elementary or secondary school and come from households earning no more than 300% of the area’s median gross income. That threshold is relatively high in many regions, meaning most middle-income families in participating states could qualify.

The scholarship amounts themselves are not limited to $1,700. Although donors are limited to that appropriation amount, SGOs can pool funds and award larger grants based on their mission and the needs of the students they serve.

Which states are participating?

The administration says that as of the most recent announcement, 23 states have opted into the Education Freedom Tax Credit, including:

• Alabama
• Alaska
• Arkansas
• Georgia
• Idaho
• Indiana
• Iowa
• Louisiana
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• North Dakota
• Ohio
• Okla
• South Carolina
• South Dakota
• Tennessee
• Texas
• Virginia
• West Virginia
• Wyoming

Unfortunately, state participation is voluntary and uneven, and families will not have access to grants unless their state completes the opt-in process and approves SGOs.

Taxpayers cannot claim the credit until they file returns for contributions made on or after January 1, 2027. The Treasury Department and the IRS are still drafting implementing rules, following a request for public comment issued in December 2025.

What this means for families

For families in participating states, the program could increase access to education services that have historically been out of reach. According to government estimates, if used widely, the credit could generate as much as $24 billion in education funding annually, with each billion dollars in grants potentially supporting tuition for about 77,000 students or tutoring for more than 300,000 students.

How that translates into real aid will depend on local circumstances. In states with existing waiting lists for tutoring or grant programs, SGO funding could reduce backlogs. In other countries, scholarships may flow primarily toward private school education or enrichment services.

The flexibility of allowable expenses means that families can tailor support to their child’s needs, whether it is after-school tutoring, specialized disability services or career-oriented programs at the high school level. The administration emphasizes that scholarships can complement rather than replace public education, especially for students who remain enrolled in public schools but need additional services.

What comes next

The Education Freedom Tax Credit is not immediate relief. Families and donors will have to wait until 2027 to begin making eligible contributions, and states must complete administrative steps to ensure SGOs are approved well before then.

For now, the most important actions are informational. Families can check if their state is participating, find out which SGOs are approved, and assess whether their household income is within eligibility limits. Taxpayers interested in claiming the credit will need to strategically plan charitable contributions once the IRS guidance is finalized.

The Treasury Department has said additional rules and instructions for taxpayers, charities and states will be issued this year.

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