Treasury, IRS propose regulations for education tax credit

Treasury and the IRS issued proposed regulations (REG-117199-25) Thursday to implement the education freedom tax credit, a new federal tax credit under Sec. 25F for contributions to organizations that provide scholarships to eligible elementary and secondary schools.

Beginning in 2027, individual taxpayers generally may claim a nonrefundable credit of up to $1,700 for qualified cash contributions to eligible organizations. Married couples filing jointly may claim a combined credit of up to $3,400. Unused credits may be carried forward for up to five years.

The proposed regulations provide rules on student eligibility, scholarship-granting organization operations, state participation, reporting requirements, and credit administration. Taxpayers could contribute to eligible scholarship-granting organizations regardless of their state of residence and generally could rely on an organization’s inclusion on an IRS list of eligible scholarship organizations when making contributions.

The regulations also include an ordering rule intended to preserve the maximum available federal credit for taxpayers who qualify for state tax credits and the new federal credit.

Companion temporary regulations (T.D. 10057) establish registration, reporting, and certification procedures for participating states and scholarship-granting organizations. The temporary rules call for the creation of IRS portals that states and scholarship organizations will use for registration and reporting, and they require scholarship organizations to provide donors with acknowledgments that include unique donor numbers and to report contribution information to the IRS.

For information about participating states, visit the IRS’s Federal Scholarship Tax Credit page.

Comments on the proposed regulations are due Dec. 1.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.