The U.S. Treasury Department and IRS released new regulations on October 2 that clarify how the federal Education Freedom Tax Credit will operate beginning in 2027. The rules address donor tax credits, student eligibility, scholarship administration, and state participation.
Iowa has already opted into the program. Iowa SGO, established through a collaboration involving Iowa ACE and the state’s 12 School Tuition Organizations (STOs), is preparing to participate in the federal scholarship program.
The federal guidance brings that effort closer to implementation, although several provisions remain proposed rather than final.
Donors Could Receive Up to $1,700 in Federal Tax Credits
Federal law allows eligible individuals to claim a nonrefundable federal income tax credit of up to $1,700 annually for qualifying contributions to approved SGOs.
The proposed regulations clarify that married couples filing jointly could potentially claim up to $3,400 combined, provided each spouse makes sufficient qualifying contributions.
Unused credits may be carried forward for up to five years. Donors cannot claim both a federal scholarship tax credit and a federal charitable deduction for the same qualifying contribution. Any qualifying state tax credit received for that contribution would also reduce the federal credit.
That last provision is particularly relevant to Iowa donors who already support scholarships through the state’s STO Tax Credit Program. Contributions to existing STOs will not automatically qualify for the federal credit.
Actual tax benefits will depend on each donor’s circumstances and compliance with federal requirements.
Federal Scholarships Will Have Different Eligibility Rules
Unlike Iowa’s Students First Education Savings Account (ESA) program, which no longer has household income limits for eligible students, federal scholarships have an income restriction.
Federal law limits eligibility to students from households earning no more than 300% of their area’s median gross income.
The new scholarships could support qualifying educational expenses at public and nonpublic schools, including tuition, tutoring, special-needs services, and educational supplies.
The proposed regulations outline methods for verifying household income and preventing duplicate reimbursements. They also clarify that students generally must reside in the state served by the SGO, although the school itself would not necessarily have to be located there.
Families should understand that federal scholarships, Iowa STO scholarships, and Students First ESAs are separate programs. Receiving assistance through one does not automatically establish eligibility for another.
Scholarship Organizations Face New Requirements
Federal law requires SGOs to devote at least 90% of their income to qualified scholarships.
The proposed regulations clarify how that percentage would be calculated and offer flexibility for organizations operating multiple scholarship programs. They also establish proposed safeguards involving income verification, scholarship spending, and recordkeeping.
The temporary regulations establish procedures for states to identify qualifying SGOs and for organizations to account for federal scholarship contributions.
Multistate organizations would need separate accounting for contributions designated to participating states under the proposed rules.
These requirements will guide Iowa SGO as it prepares for federal scholarship implementation. Iowa SGO is intended to complement Iowa’s existing scholarship programs while preserving the independence of the state’s STOs and their established relationships with schools and donors.
Although Iowa SGO already exists, its eligibility to receive contributions qualifying for the federal credit depends on meeting federal requirements and inclusion on the appropriate state SGO list.
What Happens Before 2027?
Governor Kim Reynolds opted Iowa into the federal program in January 2026.
Under the temporary regulations, participating states that made advance elections must submit their initial lists of qualifying SGOs by February 15, 2027. The IRS will maintain a public list of participating organizations.
Treasury and the IRS are accepting public comments on the proposed regulations through December 1, 2026.
Families still need information about scholarship application procedures, available awards, and which expenses individual SGOs will cover. Donors will need to verify that an organization qualifies before making contributions intended for the federal tax credit.
The October regulations clarify much of the program’s structure. The next developments to watch are final federal guidance, Iowa’s list of qualifying scholarship organizations, and the application procedures those organizations establish.