Treasury's §25F rules are out: $3,400 for married couples, a workable 90% test, and no state add-ons

The rules are here. On October 1, 2026, Treasury and the IRS filed the regulations for the federal Education Freedom Tax Credit (§25F) for public inspection at the Federal Register, two days after they cleared White House review. There are two documents. The first is a 181-page notice of proposed rulemaking (REG-117199-25) covering the whole credit: who can claim it, how much, what an SGO must do, and what a state must certify. The second is 61 pages of temporary regulations (T.D. 10057) that cover the pieces needed before January 1: SGO registration with the IRS, donor acknowledgments and reporting, and the procedures for state elections and SGO lists. The temporary regulations take effect without a comment period and apply from September 1, 2026. Both are scheduled for publication in the Federal Register on October 2. The proposed rules are not final, but Treasury says taxpayers, organizations, and states "may rely on these proposed regulations for qualified contributions made on or after January 1, 2027," as long as they follow them in full and consistently.

Married couples: up to $3,400. The statute caps the credit at $1,700 "to any taxpayer," and whether a joint return counts as one taxpayer or two was the biggest open question for donors. Treasury chose two. The proposed rule says that for the $1,700 cap, "married taxpayers who elect to file a joint return ... are treated as separate taxpayers," so a couple can claim up to $3,400 on a joint return when each spouse gives at least $1,700. Treasury grounds that reading in long-standing regulations that treat a joint return as two taxpayers sharing one income. It replaces the cautious reading we gave in May, and it does by regulation what Sen. Hyde-Smith's S.5322 proposed to do by amendment. Two practical notes: each spouse makes and designates their own gift (in Treasury's example, each spouse gives $2,000 and each gets a $1,700 credit), and the combined credit still cannot exceed the couple's tax liability, with any unused credit carried forward for up to five years.

Keep your state credit and the full federal credit. §25F reduces the federal credit by any state tax credit for the same contributions, and the question was whether that reduction comes before or after the $1,700 limit. Treasury put it before, which means a state credit no longer eats into the federal one as long as the gift is large enough to cover both. Its example: give $2,500 and claim a $500 state credit. Subtract the $500 from the $2,500 first, leaving $2,000, so the federal credit is the full $1,700 and the donor gets $2,200 back in total. Apply the cap first instead, and the federal credit drops to $1,700 minus $500, or $1,200, for $1,700 back in total. Treasury's reading is worth $500 more to that donor. When a state credit covers a mix of gifts, it is applied first to contributions not designated for §25F, which preserves as much of the federal credit as possible. A state tax deduction, as opposed to a credit, does not reduce the federal credit at all. Treasury's stated aim is only to keep the combined state and federal benefit from exceeding the gift itself, so donors in the states that already run scholarship tax credits can use both programs.

The 90% test, and how SGOs can meet it. The statute requires an SGO to spend at least 90% of "the income of the organization" on scholarships. Treasury reads "income" as all gross receipts from every source, which would be a hard test for any organization that does more than scholarships. The relief is a safe harbor: if at least 85% of an organization's activities are scholarship granting (counting the administration, fundraising, and compliance work that supports it), it measures the 90% test against its §25F segregated account alone, meaning the qualified contributions and their earnings. In plain terms: at least 90% of what comes into the §25F account, the donations made for the credit plus their earnings, goes to scholarships, and the organization can raise separate money to run itself, which Treasury says is part of the point. Treasury estimates the safe harbor could bring in about 450 additional organizations. The 90% for each year's income has to be spent by the end of the following taxable year, so a first-year SGO has until the end of its second year. Money counts as spent when it is paid, so a multi-year award counts in the year each payment goes out, and funds moved to a qualified digital wallet count when transferred, as long as the SGO does not keep ownership of them.

Two consequences matter for anyone still deciding how to set up. An organization whose non-scholarship work is more than 15% of its activities, such as a school foundation or community nonprofit with other programs, gets no safe harbor, so the 90% test would apply to everything it takes in. Treasury acknowledges the safe harbor "may require the formation of new organizations to conduct section 25F activities," and the rules make room for that: a state may list an organization whose 501(c)(3) application is still pending with the IRS, as long as the exemption, once granted, takes effect on or before January 1 of the year the list covers. An exemption generally reaches back to the date the organization was formed when the application is filed on time, so a new organization aiming for a 2027 list should be formed by January 1, 2027. A multistate SGO must be at least 85% scholarship granting, keep a separate §25F account for each state that lists it, and meet every requirement state by state, and donors choose which state's account their gift goes to.

One national standard: states cannot add conditions. An SGO is "located in" a state if it is authorized to do business there and complies with the state's general rules for charities. No headquarters or in-state staff is required, which lets established SGOs serve several states. A participating state may not require SGOs to operate under rules more restrictive than §25F's, "such as by limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses for which scholarship funds may be used." States still screen applicants, with application, documentation, and financial-reporting requirements tailored to the federal tests and to fraud prevention. A state must certify that its list includes every qualifying organization that asks to be on it, may remove an SGO only through a procedure that gives it due process, and is subject to IRS review of its procedures. These provisions are in the temporary regulations, which apply from September 1, 2026, so they govern the 2027 lists states are building now. That settles the floor-or-ceiling question in favor of one uniform program, and it is the scenario Vermont's Act 164 anticipated when it directed its governor to decline if federal rules overrode the state's conditions.

Students: where they live, and almost all of them qualify. "Solely within the State" refers to the student's residence, not the school's location. A student who lives in a participating state can use a scholarship from an SGO on that state's list at a school across the state line, while a student who lives in another state cannot, with exceptions for military families and for students whose families reside on Indian lands. The household income limit, 300% of area median gross income, follows the HUD Section 8 rules but ignores non-cash items such as an imputed return on home equity, and Treasury says roughly 96% of children in participating states would be eligible. SGOs can verify income from pay stubs, tax returns, or IRS transcripts, or instead rely on a household member's SNAP, TANF, WIC, Section 8, or SSI award letter from the last 12 months. Foster children qualify automatically, and a separate safe harbor covers tutoring and special-needs scholarships at schools in low-income census tracts, backed by an annual third-party audit. An SGO is free to set a lower income limit of its own.

What scholarships pay for, and how the money moves. "School" means a K-12 school as determined under state law, the section 530 definition. Treasury's announcement lists private-school tuition, academic tutoring, special-needs services, books, supplies, computers, and other equipment among the expenses scholarships can support, and the preamble to the proposed rule says detailed section 530 guidance on qualified expenses and schools is "a high priority" that Treasury intends to issue "as soon as possible." The proposed rule does set out the payment mechanics: tuition and school charges go directly to the school, other vendors must be verified and unrelated to the family, money to families is limited to reimbursements backed by receipts, and SGOs may pay through a qualified digital wallet. Every SGO needs systems that stop two scholarships from paying for the same expense.

Who cannot receive a scholarship. Officers, directors, and trustees; anyone who helps choose recipients, paid or not; substantial contributors, meaning anyone who gives more than $5,000 in a year when that is also more than 2% of the year's contributions, a test run against the SGO as a whole and again against its §25F account; and the family members of all of them. There is no exception for blind or anonymized selection. A spouse's gifts count toward the other spouse's total, and substantial-contributor status lasts for that year and the next.

The paperwork, starting now. Every SGO must register in a new IRS SGO portal "as soon as possible and preferably before" it appears on any state list, because registration is how it gets the format for the unique donor numbers donors will need, which Treasury chose so SGOs do not collect Social Security numbers (our donor number explainer covers how it works). By January 31 each donor gets a written acknowledgment with the SGO's EIN, the year's designated total, the donor number, and any goods or services provided; by February 28 the SGO reports each donor's name, address, and total to the IRS. Donors claim the credit on Form 8525 and list each SGO's donor number. A gift must be cash (checks, cards, electronic transfers, and after-tax payroll deduction count; digital assets do not), the donor must designate it as a §25F contribution when giving, and that designation cannot be revoked. Gifts made through a partnership or S corporation do not count. Under the proposed rule, SGOs would also attach an annual certification to their Form 990 and commission an annual financial and programmatic audit, from an independent professional above $500,000 in receipts or a committee of independent people at or below it.

The calendar for states. For 2027, a state must file its advance election on Form 15714 by January 1, 2027, and then complete it by submitting its SGO list by February 15, 2027. A state that misses the second step is out for the year. Elections cover one calendar year at a time and cannot be revoked once completed. For new organizations without an operating history, a state can rely on governing documents, written policies, and other records. Treasury counts 30 states that had elected as of August 2026, and states still deciding, including New York, whose governor said she would review the federal guidance before formally filing, now have the rules in hand with three months to act.

What comes next. Comments on the proposed rule are due 60 days after publication, which works out to December 1, 2026, through regulations.gov under REG-117199-25. A public hearing is scheduled for December 15, 2026 at 10 a.m. Eastern; requests to speak are due with the comments, and the hearing will be canceled if none arrive. The temporary regulations expire October 1, 2029. Treasury estimates that by 2030 the program will support 600 to 700 SGOs, with more than 11 million taxpayers giving nearly $26 billion a year and funding as many as 2.2 million scholarships.

For anyone building an SGO, the rules turn months of guessing into a checklist: make sure the organization clears the 85% activity test or form a dedicated one, register in the IRS portal when it opens, set up the segregated §25F account and donor-number acknowledgments, and apply to your state's list well ahead of the February 15 filing deadline. Our free SGO Builder walks through formation, the SGO directory shows who is already operating, and the states page tracks where every state stands.