Internal Revenue Code Section 25F: Qualified Elementary and Secondary Education Scholarships (Education Freedom Tax Credit)

1. A dollar-for-dollar, nonrefundable credit, capped at $1,700 per return

Internal Revenue Code Section 25F creates a federal income tax credit for an individual's cash contributions to a qualified Scholarship Granting Organization (SGO). The credit is dollar-for-dollar: every qualifying dollar contributed reduces the donor's federal income tax by an equal dollar, up to the statutory limit. That limit is $1,700 per return. The credit is nonrefundable, which means it can reduce a donor's federal income tax to zero but cannot produce a payment beyond the tax that is owed.

2. A 5-year FIFO carryforward, and what "nonrefundable" really means

If a donor's qualifying contribution is larger than the federal income tax available to offset in the year of the gift, the unused portion of the credit is not lost. It carries forward for up to 5 years, applied on a first-in, first-out (FIFO) basis, so the oldest unused credit is used first. Because the credit is nonrefundable, the often-repeated idea that a contribution "costs nothing" only holds when the donor actually has at least $1,700 of federal tax liability to absorb the credit. A donor with less liability uses less of the credit in that year and relies on the carryforward for the remainder.

3. The 90/10 rule and the other conditions an SGO must meet

To be a qualified SGO, an organization must satisfy several conditions set out in the statute:

• It must spend at least 90% of the organization's income on scholarships. That income includes donations plus investment income and other income, including unrelated business income. The threshold is measured against the SGO's total income, not against 90% of donations alone.
• It must be a 501(c)(3) public charity, not a private foundation.
• It must keep qualified contributions in one or more separate accounts, with no commingling of those funds.
• It must serve 10 or more students who do not all attend the same school.
• It must prioritize prior-year scholarship recipients, and then the siblings of those recipients, when awarding scholarships.

4. Which students qualify: household income up to 300% of area median gross income

Scholarships funded under this credit are intended for students whose household income does not exceed 300% of the county's area median gross income, as published by the Department of Housing and Urban Development (HUD). This ceiling is tied to the area's median gross income figure and does not vary by family size. The same percentage threshold applies regardless of how many people are in the household.

5. Donor designation: a school, but not a specific student

Under preliminary Treasury guidance, a donor may direct a contribution to a particular school, but a donor may not designate a specific student to receive a scholarship. This school-level designation reflects guidance issued ahead of formal rulemaking, and it is expected to be confirmed when the proposed Treasury regulations are published. Until those regulations are final, this point should be read as preliminary rather than settled.

6. The state opt-in mechanic and cross-state contributions

A contribution counts toward the credit only if the receiving SGO appears on a participating state's list. A state must affirmatively elect to participate for its SGOs to be eligible. Any United States taxpayer may contribute to an SGO on any participating state's list, but the scholarships funded must serve students within that state. As a practical matter, students benefit from the program only if their own state has opted in.

7. Tax-free to recipients, effective for tax years ending after December 31, 2026

Scholarships received through a qualified SGO are tax-free to the recipient. New IRC Section 139K excludes these scholarship amounts from the recipient's gross income, so a student or family does not owe federal income tax on the scholarship itself. The credit applies for tax years ending after December 31, 2026 (in plain terms, beginning January 1, 2027).