Q: What does the federal education freedom tax credit for gifts to scholarship-granting organizations entail?
A: The measure included in the budget bill that was signed into law on July 4th allows individuals to receive a dollar for dollar tax credit for donations of up to $1,700 per year to scholarship granting organizations (SGOs) offering K-12 scholarships.
Q: How many tax credits will be available?
A: There is no overall cap for the amount of tax credits available per year (so the tax credits will not “run out”). However, each taxpayer can only claim up to $1,700 in tax credits per year.
Q: Who will be eligible to receive a federal education freedom tax credit?
A: Any individual with a federal tax liability who files a Federal 1040 Form could apply for an education freedom tax credit for a donation to an eligible SGO.
Q: How much could I donate and still receive a federal education freedom tax credit?
A: Taxpayers could donate up to $1,700 per year, and there is no minimum donation required to receive a tax credit.
Q: How would the federal education freedom tax credit be different from a charitable deduction?
A: The value of a charitable deduction depends on your marginal tax rate and whether you itemize or apply the standard deduction. For example, if you are in the 22% tax bracket and itemize, a $1,000 donation saves you $220. However, the tax credit would allow you to reduce your tax liability dollar for dollar by the amount of your donation. For example, the same $1,000 donation under the tax credit would reduce your tax liability by $1,000.
Q: What steps would I have to take to apply for and receive a federal education freedom tax credit?
A: Regulations will be promulgated by the U.S. Treasury Department, which will release instructions and rules regarding the tax credits. We will be sure to keep you posted throughout the process.
Q: When could I begin applying for an education freedom tax credit?
A: Under the law, individuals can receive an education freedom tax credit for donations made after December 31, 2026 and taken against income on their 2027 federal tax return filed in 2028.
Q: Can I donate from my donor-advised fund (DAF) and receive a tax credit?
A: Gifts made through DAFs are not eligible for a federal education freedom tax credit since the donor receives a tax benefit upon investing money in a DAF rather than when a donation is made through the DAF.
Q: Can I donate stocks and receive a federal education freedom tax credit?
A: No, stock gifts are not eligible for the federal education freedom tax credits.
Q: If I donate to a state tax credit program, can I get a federal education freedom tax credit on both my state and federal taxes?
A: The bill does not allow for an individual to claim tax credits for the same donation on both their state and federal taxes. However, you could make a donation to an SGO that administers a state tax credit program and claim a tax credit on your state tax return, and then make a second donation to the same SGO and claim a federal education freedom tax credit on the second donation.
Q: Could I donate to an SGO based in another state?
A: Yes, if the SGO is approved by that state to fund scholarships for eligible students within that state. The federal education freedom tax credits will be awarded through the U.S. Treasury Department rather than your state government or the SGO’s state government.
Sign up to receive email updates. Meanwhile, please email Darla Romfo, President and CEO, or Michele Mitola, Vice President of Strategic Planning and Development, if you have any questions about the federal education freedom tax credit and what it could mean for you and your charitable giving.