Last year, as part of the One Big Beautiful Bill Act, Congress created a new initiative designed to help more families afford the education that works best for their children. The Education Freedom Tax Credit allows taxpayers to receive a federal tax credit for contributions to scholarship-granting organizations (SGOs), which then provide scholarships to eligible students for private school tuition, tutoring, special-needs services, books, supplies and other education expenses. Since the law’s passage, we’ve been waiting for the U.S. Treasury Department, which will administer the program, to provide the details on how it will work. Those proposed regulations were released today, October 1.
This represents a significant expansion of educational opportunity for families across the country and an important step toward giving parents greater control over their children’s education. The federal initiative can complement continued efforts at the state level to give families more education options. That includes expanding access to Education Savings Accounts, charter schools, and other opportunities that let parents choose the educational setting that best meets their child’s needs, regardless of income or circumstance.
Below, we break down what the newly released federal regulations say, how the program will work, and what Mississippi taxpayers and families need to know.
There are two aspects to the school choice provisions: (1) a tax credit for taxpayer contributions to organizations that provide scholarships to students in K-12 public or private schools, and (2) rules those organizations have to follow in granting scholarships, including income limits for students to qualify for the scholarships.
Tax Credit for Contributions
- Starting January 1, 2027, individual taxpayers (not corporations) can claim a tax credit (not simply a deduction) of up to $1,700 per year, or $3,400 for married taxpayers filing jointly, for contributions to “scholarship-granting organizations” (SGOs). That means if you give an SGO a total of up to $1,700 (or $3,400) in a year, you can reduce what you owe the IRS by the amount you give. This is different from a tax deduction, which only reduces the amount of income on which you pay taxes. A tax credit is a dollar-for-dollar reduction in what you pay to the IRS over the course of the year. And because it’s not a deduction, you can claim the credit whether you itemize your deductions or not.By the way, your “tax liability” doesn’t mean the amount you might have to write a check for on April 15; it means the amount of income tax you owe for the year, so federal taxpayers will qualify for the full amount if they have gross income above (roughly) $33,000 for a single filer, or about $65,000 for a married couple filing jointly.If your income is below that, you can still make contributions to SGOs, but your tax credit will be limited to your total tax liability. However, if a taxpayer can’t take the full credit for the contribution in one year, the shortage can be added to the next year’s $1,700/$3,400 cap.
- You don’t have to write one $1,700 or $3,400 check. You can give monthly or whenever you choose. You also don’t have to wait until you file your 2027 tax return in 2028 to get the tax break. Because it reduces your tax burden, you could reduce the amount your employer withholds from your paycheck each month to match the amount you are giving to the SGO, so you won’t experience a net loss in your monthly budget. (Disclaimer: this is not tax advice! You and your employer should be careful to make the right adjustments if you choose this approach. And if you do this, don’t start until January, since this only applies for 2027 taxes and future years.)
- Because it’s a federal tax credit, any federal taxpayer in any state may receive the credit for contributions to a qualified SGO anywhere in the country, as long as it is in a state that has opted into the program.
- To be sure your contributions will be allowed for gifts to an SGO, Treasury says you can rely on whether the SGO is on the list of approved SGOs the governor sends to Treasury, which will be published on the Treasury website when the time comes. (more on that below) There are also several fraud prevention provisions that should protect the program from taxpayer or SGO abuse.
- By 2030, Treasury and the IRS estimate that the program could support 600 to 700 SGOs, with more than 11 million taxpayers making nearly $26 billion in qualified contributions annually and funding as many as 2.2 million scholarships each year.
Rules for SGOs, Including for Students who Qualify
- States must opt in (“elect”) to participate, and the governor must submit to Treasury a list of qualified SGOs in the state. Governor Tate Reeves has already made the “election” for Mississippians to be able to participate. Now that the new regulations are out, he can prepare the list of SGOs that meet the qualifications in the law and in the regulations. That list is due from him by Feb. 15.
- Eligible students to receive scholarships are those who live in a household with income up to 300% of the median gross income of their area. The vast majority of children in Mississippi would qualify, since the area median gross income in Mississippi on average, as determined annually by the US Department of Housing & Urban Development, is currently as follows, including the income limits for scholarship-eligible recipients.
Household size Median gross income Income limit (300%) 1-person household $27,205 $81,615 2-person household $62,406 $187,218 3-person household $76,637 $229,911 4-person household $86,519 $259,557 The area median income will be based on a county’s or a metro area’s median income instead of the state average, so the dollar amounts above will differ from county to county.
- Scholarship amounts are not limited by the law or regulations and will be determined by the SGO.
- Eligible expenses are tuition, academic tutoring, special-needs services, books, supplies, computers and other equipment, and other qualifying expenses connected with a student’s enrollment or attendance.
- In addition to the requirements described above, SGOs must:
- be 501(c)(3) tax-exempt organizations, meaning no for-profit organizations may participate; if an SGO has applied to the IRS for 501(c)(3) status but has not received approval, it may still be added to the list of SGOs submitted by the governor to the IRS, assuming they meet all other requirements.
- provide at least 10 scholarships to students who do not all attend the same school
- spend at least 90% of the organization’s tax-credit qualified income on scholarships
- keep separate accounts for tax credit-qualified contributions, and other contributions which are not.
- verify the income and family size of the scholarship applicant’s household
- ensure the students receiving scholarships are residents of the state
- ensure the schools receiving scholarship funds meet the requirements of the law and regulations, including ensuring the funds are spent on eligible expenses
- submit to annual audits of their own operations and contributions to schools
- prioritize students who received a scholarship the previous year and students who have a sibling who has a scholarship from the same SGO
- NOT earmark any contributions for scholarships for any particular student
- not provide scholarships to “disqualified persons,” which include leaders of the SGO and donors who contribute more than 2% of the organization’s income.
This description is a simplified explanation of the 180-page proposed regulations. There are some exceptions and nuances to some of these provisions.
Read the temporary regulations, which are mostly the technical, structural instructions for SGOs
