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What Is the Education Freedom Tax Credit? A Guide to the New Federal Tax Credit for K-12 Scholarships

Written by Tax Defense Network          
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Overview

Tax laws change frequently, and new credits often create opportunities for taxpayers to reduce what they owe while supporting causes they care about. One of the newest additions to the federal tax code is the Education Freedom Tax Credit (EFTC), a program designed to encourage charitable giving that helps fund K-12 education scholarships. As states begin opting into the program, taxpayers may be wondering how it works, who can claim it, and whether they qualify. In this guide, we’ll explain everything you need to know about the Education Freedom Tax Credit, including eligibility requirements, participating states, and how to claim the credit on your federal tax return.

Key Takeaways

  • The Education Freedom Tax Credit provides a dollar-for-dollar federal tax credit of up to $1,700 for eligible cash donations made to qualified Scholarship Granting Organizations (SGOs).

  • The credit becomes available beginning with the 2027 tax year and only applies to contributions made to SGOs in states that have opted into the program.

  • States choose whether to participate, meaning availability depends on where the qualifying SGO operates rather than automatically applying nationwide.

What Is the Education Freedom Tax Credit?

The Education Freedom Tax Credit (EFTC) is a federal incentive that encourages private donations to nonprofit organizations that award K-12 educational scholarships. Instead of donating directly to a school or student, taxpayers contribute to an approved Scholarship Granting Organization (SGO), which then distributes scholarships to eligible students.

Unlike a tax deduction, the EFTC is a tax credit. It reduces your federal income tax liability dollar for dollar. Eligible taxpayers may claim a credit of up to $1,700 ($3,400 for married filing jointly) each year. It is subject to IRS rules and any applicable reductions for overlapping state tax credits.

The goal of the program is to expand educational opportunities for lower- and middle-income families while encouraging charitable giving through federally approved nonprofit organizations.

How Does the EFTC Work?

The Education Freedom Tax Credit is designed to encourage charitable giving while expanding access to K-12 educational opportunities. Although the process involves several steps, claiming the credit is relatively straightforward. Taxpayers make a qualifying cash donation to an approved Scholarship Granting Organization (SGO). If all IRS requirements are met, they can claim a dollar-for-dollar federal tax credit on their tax return. Here’s a step-by-step look at how the process works.

  1. A participating state elects to join the federal program.
  2. The state submits a list of qualified Scholarship Granting Organizations (SGOs) to the IRS.
  3. Taxpayers make a cash donation to an approved SGO.
  4. The SGO awards scholarships to eligible students for qualified K-12 educational expenses.
  5. The taxpayer claims the Education Freedom Tax Credit when filing their federal tax return.

Some important rules include:

  • Contributions must be cash donations.
  • Donations cannot be earmarked for a specific student.
  • The credit is non-refundable, meaning it cannot reduce your tax below zero.
  • Unused credits may generally be carried forward for up to five years.
  • Contributions claimed for the credit cannot also be claimed as a charitable deduction on the same federal return.

Who Is Eligible to Claim the Education Freedom Tax Credit?

Most individual U.S. taxpayers with federal income tax liability may qualify to claim the credit if they:

  • Make a qualifying cash contribution to an approved SGO
  • Donate to an SGO located in a participating state
  • Meet all IRS reporting requirements for the credit

The maximum annual credit is $1,700 per taxpayer.

Which Scholarship Granting Organizations Qualify?

Not every non-profit organization qualifies for the Education Freedom Tax Credit. Under federal law, qualifying SGOs generally must:

  • Be recognized as a 501(c)(3) public charity (not a private foundation).
  • Award scholarships to multiple students attending more than one school.
  • Spend at least 90% of qualified contributions on scholarships.
  • Verify student eligibility and household income.
  • Maintain proper financial records and reporting.
  • Avoid directing scholarships to related parties or allowing donors to earmark contributions for specific students.

Each participating state submits its approved list of qualifying SGOs to the IRS. Taxpayers should verify that an organization appears on the state’s approved list before contributing.

Is My State Participating?

One unique aspect of the Education Freedom Tax Credit is that state participation is voluntary.

Governors (or another authorized state official) must elect to participate and submit a list of approved Scholarship Granting Organizations to the IRS before taxpayers can claim the federal credit for donations made to organizations in that state.

The American Legislative Exchange Council (ALEC) maintains a list of participating states and updates it as additional states join the program. As of May 2026, 29 states had officially elected to participate, 3 have opted out, and 18 states are continuing to consider participation. Because participation may change over time, taxpayers should verify their state’s current status before making a qualifying contribution.

Frequently Asked Questions