Plugged In To Education
October 7, 2026
SPECIAL EDITION:
Federal Officials Propose Regulations for Education Tax Credit
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have officially proposed regulations for comment to implement the “Education Freedom Tax Credit.” Enacted under Section 25F of the Internal Revenue Code, the federal initiative creates a nationwide mechanism encouraging private contributions to qualified “Scholarship-Granting Organizations” (SGOs) beginning on January 1, 2027.
Consistent with the underlying law, under the draft rules, individual taxpayers can claim a dollar-for-dollar nonrefundable federal income tax credit of up to $1,700 for qualified cash contributions to eligible SGOs. The draft rules clarify an open question that allows for married couples filing jointly to be eligible for up to $3,400. The funds collected by SGOs are designated to support K–12 student scholarships for expenses defined as those allowable for expenditure under Coverdell Education Savings Accounts, which can be used for private school tuition, tutoring, special education services, books, supplies, technology, uniforms, room and board and extended day programs. The proposed guidelines, consistent with federal law, include the following:
- State Opt-In Requirement: The federal credit operates on a voluntary state-by-state basis; states must formally elect to participate and approve participating SGOs.
- IRS Registration & Oversight: SGOs must register via a dedicated IRS portal, undergo annual financial and programmatic audits, and allocate at least 90% of revenue directly toward student scholarships.
- Universal Eligibility: Under the law, families earning up to 300% of their area median gross income (AMI) are eligible to receive scholarship awards. The proposed rules contemplate a narrower scope, such as studies of certain subject matter or a lower allowable income threshold.
Attention in New York now turns to whether Governor Kathy Hochul will approve New York’s participation in the program. Federal law grants the Governor sole authority to opt into the program, though state legislators may attempt to restrict or challenge that power.
Governor Hochul’s office has signaled her intention to participate in the federal initiative on several occasions. Statements issued by her administration indicate support for the scholarship tax credit and its potential to deliver additional educational resources to New York students and schools, contingent upon a thorough review of the final federal regulatory proposal.
Supporters estimate significant potential fiscal impact if New York officially participates, including up to $1.5 billion annually in private, tax-incentivized educational funding for New York students, with no direct cost to the State’s budget.
Critics argue that tax credit voucher mechanisms divert focus and indirect resources away from traditional public-school systems.
What’s Next?
The Treasury Department’s public comment period for the proposed regulations is open through December 1. Following the receipt of public feedback and the issuance of final rules, Governor Hochul’s administration is expected to complete its formal review and confirm whether New York will formally elect to participate ahead of the January 1, 2027 program rollout.
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