How Could the New Education Freedom Tax Credit Affect Your K-12 Educational Organization?

Preparing for New Scholarship Funding Opportunities in 2027

For private schools, public K–12 educational entities, and not-for-profit organizations supporting education, a new federal tax credit could create additional opportunities to fund scholarships and educational services beginning in 2027.

The Education Freedom Tax Credit (EFTC), established under the One Big Beautiful Bill Act, provides a federal income tax incentive for individuals who contribute to qualifying Scholarship Granting Organizations (SGOs).

While the credit is available to individual donors, educational organizations may also benefit from additional scholarship funding. With the program set to begin January 1, 2027, now is a good time for educational leaders to explore how it works, what is required to participate, and what it could mean for their organizations.

Understanding the Education Freedom Tax Credit

The EFTC allows eligible individual taxpayers to receive a nonrefundable, dollar-for-dollar federal income tax credit for qualifying cash contributions to approved SGOs.

Under the program:

• Individuals may qualify for a federal income tax credit of up to $1,700 annually.
• Married couples filing jointly may qualify for up to $3,400 annually, provided each spouse contributes at least $1,700.
• Contributions must be directed to qualifying SGOs in participating states.
• SGOs distribute scholarships to eligible students for approved K–12 educational expenses.

For private schools, scholarship funding may help eligible families cover tuition and related educational costs.

For public school students, funding may support tutoring, educational therapies, special education services, and other qualifying expenses.

Student Eligibility and Qualifying Educational Expenses

Under guidance issued by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) in October 2026, students must generally reside in households with income at or below 300% of the applicable area median gross income and meet additional program requirements.

SGOs are responsible for confirming that students meet the requirements and distributing funds for eligible educational expenses. For families receiving scholarships, the funds are generally not considered taxable income when used for qualifying expenses.

What requirements must scholarship granting organizations meet?

Educational organizations considering participation should understand that the federal program establishes specific requirements for SGOs.

According to the October 2026 Treasury and IRS guidance, qualifying organizations must:

1. Maintain qualifying tax-exempt status. SGOs must operate as Section 501(c)(3) public charities.
2. Segregate program contributions. Contributions designated for the EFTC must be maintained separately from other organizational donations.
3. Support students across multiple schools. SGOs must provide scholarships to at least 10 students who do not all attend the same school.
4. Meet scholarship distribution requirements. At least 90% of the organization’s income must be used for scholarships.
5. Verify student eligibility. Organizations must establish procedures to confirm applicable household income requirements.
6. Observe restrictions on scholarship recipients. SGOs cannot award scholarships to certain disqualified individuals, including specified organizational insiders, significant donors, and related family members.

Organizations with existing scholarship programs or affiliated foundations should evaluate whether their current structures satisfy the federal requirements.

Should your organization establish an SGO or partner with an existing one?

Establishing an SGO allows organizations to take a more direct role in scholarship administration but also brings additional governance, financial reporting, and compliance responsibilities. Even schools with existing foundations may not automatically qualify under the new federal program.

For organizations looking to support scholarship opportunities without managing these responsibilities, partnering with an established, qualifying SGO may be a more practical option.

What should Virginia educational organizations know?

Virginia elected to participate in the EFTC program in January 2026, opening the door for educational organizations across the state to explore potential opportunities under the new federal credit. However, there are still a few steps to complete before the program can take effect.

To participate in 2027, Virginia must submit a certified list of qualifying Scholarship Granting Organizations (SGOs) by February 15, 2027. Schools and other educational organizations already involved in Virginia’s Education Improvement Scholarships Tax Credits program should keep in mind that existing state approval does not automatically qualify them for the new federal program.

As the state works through the certification process, educational leaders should stay informed about additional guidance and review how the federal requirements may affect their organizations.

Preparing your educational organization for 2027

As the EFTC program approaches, now is a good time to consider how your organization may be affected.

If your organization is considering SGO status, take a closer look at your accounting procedures, reporting capabilities, and governance responsibilities. It is also important to ensure that any communications with donors and families clearly explain the new credit and how it differs from existing state programs.

With additional federal guidance and state certification details still developing, staying informed will help your organization prepare for potential opportunities in 2027.

How Keiter Can Support Your Organization

Understanding the requirements early can help leadership assess whether participation aligns with its mission and available resources. Contact your Keiter Not-for-Profit Opportunity Advisor to discuss the potential tax, accounting, and operational considerations for your organization.