On October 2, 2026, the U.S. Treasury Department published in the Federal Register the long-awaited Treasury Regulations interpreting the Education Freedom Tax Credit (“EFTC”), codified at Internal Revenue Code (“Code”) § 25F. The EFTC goes into effect starting January 1, 2027 and creates a new type of dollar-for-dollar tax credit for donations to a new type of tax-exempt organization exempt under Code § 501(c)(3) called a “scholarship granting organization” (“SGO”).
To resolve ambiguities in Code § 25F and lay out a framework that both states and SGOs can follow before January 1, 2027, the Treasury Department has released federal regulations interpreting the law in two parts. The first is the “Proposed Regulations” at RIN 1545-BR97, which will be permanent once finalized after the notice and comment period has ended. The second is the “Temporary Regulations” at RIN 1545-BS17, which take effect immediately, are set to expire on October 1, 2029, and only “implement certain requirements and procedures for States that make elections to participate in this Federal tax credit and organizations that have been certified as scholarship granting organizations by one or more participating States” (collectively, the “Regulations”). Because the Treasury Department is accepting notice and comment on the Proposed Regulations until December 2, 2026, some provisions of the Regulations may change.
This is the first of a series of blog posts from Brown & Streza LLP that will:
- Explain the EFTC’s tax credit in detail, including what an SGO must be able to tell prospective donors about the credit available for their qualified contributions;
- Provide a summary of the five categories of legal requirements that SGOs must follow when operating;
- Discuss specific provisions of the Regulations as they impact those five categories of requirements; and
- Discuss open questions and issues not addressed by the Regulations.
Because the EFTC’s requirements for soliciting, processing, and acknowledging contributions are intensively regulated, this first post is dedicated to the measures an SGO will need to take to track and handle contributions that qualify for tax credits under Code § 25F, together with the fundamentals of the tax credit itself that an SGO must understand in order to administer those requirements and answer donor questions.
The EFTC Explained
The EFTC was enacted by Congress under the One Big Beautiful Bill Act, which was signed into law by President Trump on July 4, 2025, and is codified at Code § 25F. The EFTC allows for a dollar-for-dollar federal tax credit[1] of up to $1,700[2] for the “aggregate amount of qualified contributions”[3] made by a donor to an SGO over the taxable year. The EFTC only provides tax credits to an “individual” who is a “citizen or resident of the United States,” not businesses, and only contributions of cash can qualify for tax credits.[4] Contributions that qualify for this federal tax credit are counted in the aggregate over the course of a calendar year, so a series of small contributions adding up to $1,700 will qualify for the full tax credit amount. The EFTC is not subject to any annual program cap, so there is no limit on the total amount of tax credits the federal government will permit under this program.
The EFTC Is Nonrefundable and Capped by a Donor’s Tax Liability, But Carries Forward for Up To Five Years.
Although the EFTC offers a federal tax credit of up to $1,700, it is a nonrefundable credit. The Proposed Regulations state that “[t]he section 25F credit allowed for a taxable year may not exceed the taxpayer’s tax liability as defined in section 26(a), based on the tax imposed for such taxable year as reduced by the sum of the nonrefundable personal credits.” This means that an individual whose federal tax liability is less than the credit otherwise available cannot obtain a refund of the difference. Excess tax credits do roll over, however, for up to five subsequent years.[5]
The Charitable Contribution Deduction Under Code § 170 Applies to Amounts Donated to an SGO in Excess of the Credit Claimed
According to the Proposed Regulations, “[a]ny qualified contribution for which a credit is allowed under section 25F may not be taken into account as a charitable contribution for purposes of section 170,” preventing one donation from qualifying for both a credit and a deduction.[6] However, any additional amount donated above the $1,700 tax credit amount can further qualify for a charitable contribution deduction under Code § 170, provided that the rules for deductibility under Code § 170 are followed.[7] Any amount that qualifies for a charitable contribution deduction under Code § 170 comes after any contribution amount that qualifies for a dollar-for-dollar tax credit under the EFTC.
Taxpayers That Are Married Filing Jointly Can Obtain $3,400 in Tax Credits Under the EFTC
Notably, the Proposed Regulations remove what some advocacy groups, including the United States Conference of Catholic Bishops[8] and American Federation for Children[9], have derided as the “marriage penalty” by increasing the available tax credit amount to $3,400 for married couples filing jointly, treating each spouse as a separate contributor.[10]
Example 2 in the Proposed Regulations shows how $4,000 in donations to an SGO by a married couple will be treated for purposes of both the EFTC and the Code § 170 charitable contribution deduction, as follows:
“B and C each contribute $2,000 to Org X. Each designates the entire amount of their contribution as a qualified contribution and each receives a timely written acknowledgement in accordance with § 1.25F-4(c). Neither B’s nor C’s contribution satisfies the requirements for any state credits. […] Each of B and C’s contributions result in a $1,700 allowed section 25F credit, resulting in a total of $3,400 that may be claimed on B and C’s joint return. The credit will be subject to their combined tax liability limitation under section 26(a). […] The $3,400 of qualified contributions cannot be taken into account as a charitable contribution for purposes of section 170. The remaining $600 from the combined $4,000 qualified contributions may be deductible as a charitable contribution if it meets the requirements of section 170 and the regulations thereunder.”
How Contributions That Qualify for Both the EFTC and Existing State Tax Credits Will Work
An ordering rule under the Proposed Regulations provides that the federal tax credit available for a qualified contribution is first reduced by the amount of any state tax credit claimed with respect to that contribution.[11] This is notable because approximately 18 states[12] have implemented some form of scholarship tax credit under which donations to state-level SGO equivalents qualify for varying degrees of state tax credits, some of which offer less than a 100% state tax credit. For example, Indiana’s School Scholarship Tax Credit Program offers donors a 50% state tax credit for contributions to state-certified SGOs.[13]
Example 3 of the Proposed Regulations illustrates how this ordering rule will work:
“In January 2027, Taxpayer D contributes $1,500 to Org X and $500 to Org Y. D designates the entire amount of each contribution as a qualified contribution and receives a timely written acknowledgement for each in accordance with § 1.25F-4(c). In addition, Org X qualifies as a State tuition granting organization under thelaws of State Q. State Q offers a State credit equal to 40 percent of an individual’s contributions up to $1,000 to a State tuition granting organization, and D’s $1,500 contribution to Org X also satisfies the requirements for the State credit. In February 2028, D files a 2027 Form 1040 and the appropriate State Q income tax return. D claims a State credit of $400 on the State Q income tax return. Analysis. D’s $2,000 of qualified contributions are reduced by $400, the amount of State credits claimed on the taxpayer’s State tax return with regard to those qualified contributions. The remaining $1,600 of qualified contributions is less than $1,700, so D is allowed a $1,600 section 25F credit that may be claimed on D’s return for 2027, subject to the tax liability limitation under section 26(a) and paragraph (d) of this section.”
Given the IRS’s interpretation of the state credit offset rule under Code § 25F(b)(2), many SGOs will likely choose to participate in both state and federal scholarship tax credit programs, because a donor can often capture meaningful credits under each regime. For example, if a donor contributes $3,400 in the aggregate to an SGO that is certified under both Indiana state law and the federal EFTC, the donor would first receive a 50% Indiana state tax credit of $1,700 (i.e., 50% of $3,400). Under Proposed Regulation § 1.25F-2(c)(2)’s credit calculation ordering rule, the federal credit is then calculated by reducing the donor’s $3,400 qualified contribution by the $1,700 state credit, yielding a federal credit of $1,700 (the maximum allowable).
Thus, the donor would receive a combined benefit of $3,400 in tax credits ($1,700 in Indiana state and $1,700 in federal) from a $3,400 contribution. The Proposed Regulations do not expressly state whether a donor seeking both credits must make one donation or two, but Code § 25F(a) refers to the aggregate amount of qualified contributions made during the taxable year, which suggests that a single donation should suffice. Further guidance from both applicable state and federal authorities may be necessary to clarify the precise mechanics of dual-program participation.
Example 4 of the Proposed Regulations illustrates this point:
“In January 2027, Taxpayer E contributes $4,000 to Org X. E designates $1,700 as a qualified contribution and receives a timely written acknowledgement in accordance with § 1.25F-4(c). In addition, Org X qualifies as a State tuition granting organization under the laws of State Z. State Z offers a $400 State credit equal to 10 percent of an individual’s contributions of up to $4,000 to a State tuition granting organization, and E’s entire contribution (both the qualified contribution and non-qualified contribution portions) also satisfies the requirements for the State credit. In February 2028, E files a 2027 Form 1040 and the appropriate State Z income tax return. E claims a State tax credit of $400 on the State Z income tax return. […] Based on the ordering provision in paragraph (c)(2) of this section, E’s $400 State credit is treated as being allowed first from the $2,300 non-qualified contribution to the SGO, so the $1,700 qualified contribution is not reduced by the $400 State credit. E’s $1,700 qualified contribution to the SGO results in $1,700 of allowed section 25F credit that may be claimed on E’s return for 2027, subject to the tax liability limitation under section 26(a) and paragraph (d) of this section.”
What SGOs Will Need to Obtain From Donors at the Time of Donation
Because one or more donations may qualify for different types of federal and state tax credits and deductions, an SGO will need to acquire two categories of information regarding the type and characterization of donor contributions when accepting such contributions.
First, Proposed Regulation § 1.25F-1(a)(12) requires that a donor designate that some or all of his or her contribution is a “qualified contribution” for purposes of qualifying for EFTC tax credits. The Proposed Regulations state that at the time the contribution is made, “a taxpayer would be required to identify, to the recipient SGO at the time of making the contribution, that the contribution is intended to be a qualified contribution and should be deposited in the SGO’s section 25F segregated account (or, if the SGO is a multistate SGO, that the qualified contribution should be allocated to the SGO’s section 25F segregated account for one or more of the covered States on whose State SGO list the SGO appears).”
Second, the Proposed Regulations require a multistate SGO to allow donors to designate how their qualified contribution should be allocated among the covered States on whose State SGO lists the SGO appears, and to deposit all qualified contributions in accordance with those donor designations.[14] The mechanics of the section 25F segregated account referenced above, including how an SGO must establish and maintain one, will be addressed in a later post in this series.
For SGOs qualified to receive contributions under both the EFTC and any state tax credit regime, corresponding state requirements may also apply. Like the EFTC, Indiana’s School Scholarship Tax Credit Program requires that a donor designate in writing that his or her contribution will be used in the scholarship program. The program also separately requires that a donor be permitted to designate a specific participating school at the time of his or her donation, while prohibiting an SGO from limiting the availability of scholarships to the students of only one participating school.[15] The Regulations do not address whether school-specific donor designations are permitted for purposes of the EFTC, and future IRS guidance may be needed to resolve the question.
The SGO Timely Charitable Contribution Acknowledgment Letter and Unique Donor Number
Once a donor makes contributions to an SGO, the Proposed Regulations require SGOs to provide a written acknowledgment to donors.[16] While this acknowledgment letter would contain much of the same information required in the current contemporaneous written acknowledgment letter required for the charitable contribution deduction under Code § 170(f)(8), the Proposed Regulations additionally “would require an SGO to generate a unique donor number and to provide it to the donor as part of a timely written acknowledgement no later than January 31 of the calendar year following the calendar year in which the donor made a qualified contribution to the SGO.”[17] Thereafter, each SGO must, through the forthcoming IRS SGO Portal, report to the IRS the information regarding each qualified contribution “no later than February 28 of the year following the calendar year in which such qualified contributions were made.”[18] The unique donor number is used to avoid having SGOs collect and store donor Social Security numbers.
This timely contribution acknowledgment imposes a greater burden on an SGO than the contemporaneous charitable contribution acknowledgment letter issued by ordinary Code § 501(c)(3) organizations, since it will require an SGO to maintain a running ledger of each donor and the unique donor number issued to that donor in order to ensure that the donation qualifies for the tax credit. Charitable contribution acknowledgment letters under Code § 170(f)(8) are currently required to be issued “contemporaneously,” which means that they must be furnished to the donor by the earlier of the date the donor files a return for the year of the contribution or the due date for that return. An SGO, by contrast, must issue the timely acknowledgment letter by January 31 and then provide the same information to the IRS by February 28 through the SGO Portal.
The New Form 8525 Reporting Requirement for Donors
Finally, the Proposed Regulations state that the IRS will require a donor to file Form 8525 annually with the donor’s Form 1040 in order to claim the EFTC.[19] Form 8525 will require that the donor report “for each SGO to which the taxpayer has made a qualified contribution during the taxable year, the unique donor number that the SGO was required to provide as part of a timely written acknowledgement.”[20] Form 8525 and its instructions have not yet been released by the IRS as of the date of this post.
The consequences of omitting the donor number on Form 8525 are severe. Under Proposed Regulation § 1.25F-2(g)(2), “[a] taxpayer that does not provide the required donor number(s) on the taxpayer’s Form 8525 […], will be presumed not to have made a qualified contribution to that SGO. To rebut this presumption, the taxpayer will need to submit the timely written acknowledgement from the SGO that includes the unique donor number or otherwise provide evidence satisfactory to the Commissioner of the amount of the taxpayer’s qualified contribution(s).”[21] Retention of the SGO’s acknowledgment letter by a donor is therefore essential, and an SGO’s failure to issue a correct and timely acknowledgment is a direct threat to its donors’ credits.
Conclusion
In sum, SGOs operating under the EFTC and corresponding state tax credit regimes will face significant administrative and legal requirements when soliciting, processing, and acknowledging contributions from donors that qualify for state and federal tax credits, and a missed acknowledgment deadline can cost a donor the credit entirely.
[1] Code § 25F(a).
[2] Code § 25F(b)(1).
[3] Code § 25F(a).
[4] Proposed Regulation § 1.25F-1(a)(12)(iii) defines “cash” as meaning “physical currency, check, money order, electronic transfer, after-tax payroll deduction, or other similar method, in each case all in U.S. dollars, and excludes “any digital asset.” This means that, unlike the charitable contribution deduction under Code § 170, in-kind contributions of real or personal property, including stock, cryptocurrencies, stablecoins, or other noncash assets will not qualify for the tax credits under the EFTC.
[5] Proposed Regulation § 1.25F-2(e)(2).
[6] Proposed Regulation § 1.25F-2(f).
[7] Id.
[8] United States Conference of Catholic Bishops, Comments on Notice 2025-70 Regarding the Individual Tax Credit for Qualified Contributions to Scholarship Granting Organizations.
[9] Tommy Schultz, AFC Celebrates New Treasury Guidance, Citing Major Step Forward for the Education Freedom Tax Credit, American Federation for Children, https://www.federationforchildren.org/afc-celebrates-new-treasury-guidance-citing-major-step-forward-for-the-education-freedom-tax-credit/ (October 1, 2026).
[10] Proposed Regulation § 1.25F-2(a)(2).
[11] Proposed Regulation § 1.25F-2(c)(2).
[12] See EdChoice, School Choice Across the United States, https://www.edchoice.org/all-programs/ (last accessed October 2, 2026).
[13] Indiana Code § 6-3.1-30.5-8.
[14] Proposed Regulation § 1.25F-3(c)(3).
[15] Indiana Code § 20-51-3-3.
[16] Proposed Regulation § 1.25F-4(c)(1).
[17] Proposed Regulation § 1.25F-4(c)(1)(i)(C).
[18] Proposed Regulation § 1.25F-4(c)(2)(ii).
[19] Proposed Regulation § 1.25F-2(g).
[20] Id.
[21] Proposed Regulation § 1.25F-2(g)(2).
