Married donors could get $3,400 tax credit under federal education scholarship program

The federal rules provide the clearest roadmap yet for how the Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit, will operate.

The U.S. Treasury Department released rules Oct. 1 providing the clearest roadmap yet on how the Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit, will operate.

Here are seven key things the rules clarify for taxpayers, students, scholarship-granting organizations and states participating in the program:

1. Married couples can receive the credit for up to $3,400 in qualified contributions.
2. Taxpayers can donate to an eligible scholarship-granting organization in any participating state.
3. A student’s household income is defined largely by money actually received by the family.
4. Students can use scholarships across state lines.
5. Scholarship-granting organizations will face annual compliance reviews and financial and program audits.
6. States have until Feb. 15, 2027, to submit their first list of approved scholarship granting organizations.
7. More guidance is to come on eligible expenses.

The program takes no funding away from public schools, but it could unlock $1 billion for local public school students if Gov. J.B. Pritzker opts Illinois into the program. He has until Jan. 1 to decide.

1) Married couples can donate up to $3,400 in qualified contributions.

Married couples filing jointly could claim up to $3,400 in tax credits if each spouse makes at least $1,700 in qualified donations to scholarship-granting organizations.

2) Taxpayers can donate to an eligible scholarship-granting organization in any participating state.

The Treasury Department confirmed that taxpayers will not be restricted to donating to scholarship organizations in their home states. A taxpayer could donate to any government-approved scholarship-granting organization, regardless of where the taxpayer lives. That means Illinois taxpayers could still claim the tax credit by donating to scholarship-granting organizations in other states if Pritzker does not opt into the program.

There’s already a campaign vying for Illinoisans’ donations: A billboard in south suburban Chicago near the Indiana border is encouraging Illinoisans to donate to Indiana scholarship-granting organizations if Pritzker does not opt in.

3) A student’s household income is defined by money actually received by the family.

The proposed rules count the money a family actually receives when determining student eligibility, rather than adding estimated income from assets. The Treasury Department estimates that under this approach, about 95% of U.S. school-age children would qualify for donated money.

4) Students can use scholarships across state lines.

A student living in a state participating in the program could use scholarship money for qualified education expenses in another state. That means an Indiana student could potentially use a scholarship from an Indiana scholarship-granting organization to attend an Illinois private school even if Illinois does not opt into the program.

5) Scholarship-granting organizations will face annual compliance reviews and financial and program audits.

Scholarship-granting organizations would submit an annual federal certification showing they followed the tax credit program’s requirements. That includes rules governing student eligibility, qualified expenses, scholarship spending, state residency and the handling of program funds.

Scholarship-granting organizations also will undergo annual audits reviewing both their finances and how they operate the scholarship program. Organizations with more than $500,000 in annual receipts would need an outside independent auditor, while smaller organizations could use an independent committee unaffiliated with management.

6) States have until Feb. 15, 2027, to submit their first list of approved scholarship granting organizations.

States opting into the program for 2027 must make their advance election by Jan. 1, 2027. But the rules give them until Feb. 15, 2027, to finalize that decision by submitting their list of approved scholarship-granting organizations.

7) More guidance to come on eligible expenses.

More guidance is still to come before the program launches. The Treasury Department said it is developing separate rules clarifying which K-12 education expenses scholarships can cover. Issuing that guidance is a “high priority,” the department said.

Opting in helps Illinois donors keep funds local

Pritzker can opt Illinois into the Federal Scholarship Tax Credit, also known as the Education Freedom Tax Credit, and unlock as much as $1 billion in donated money for students in the state.

Or, he can refuse to opt in and let that money flow to the federal government and its priorities.

Colorado Gov. Jared Polis plans to opt his state into program, calling it a no-brainer.

“The more Democratic governors learn about it, I fully expect that most will come around and participate,” Polis has said. “Because from our perspective, it’s free money.”

The program takes no funding away from public schools, but it could help more money flow directly to local public school students.

Donors can keep their dollars local by contributing directly to local public school foundations that qualify as scholarship-granting organizations or to regional scholarship-granting organizations.

If Illinois opts into the program, taxpayers will have two options:

• Donate $1,700 individually, or $3,400 as a married couple filing jointly, to an eligible scholarship-granting organization and directly fund education in Illinois.
• Send that money to the federal government via taxes for the government to use on any number of priorities or agendas.

The best way to help public education will be to donate to a local scholarship-granting organization, including eligible public school foundations. Those foundations already raise private donations to support their schools. A 1:1 tax credit would incentivize more of this giving, allowing public school foundations to expand their fundraising and increase the number of students they serve.