The Treasury’s Proposed EFTC Rules Explained: What Changed on October 1

On October 1, 2026, the U.S. Department of the Treasury and the Internal Revenue Service moved forward with new regulatory guidance for the Education Freedom Tax Credit (EFTC), also called the Federal Scholarship Tax Credit (FSTC).

The proposed regulations were published in the Federal Register on October 2, alongside a separate set of temporary regulations.

Together, these developments provide a clearer framework for implementing the EFTC initiative in 2027.

The key distinction is that the proposed regulations are not final, while the temporary regulations establish requirements that become effective December 1, 2026.

Here’s what taxpayers, families, and Scholarship Granting Organizations (SGOs) need to know.

What Did the Treasury Clarify?

The October regulatory package addresses several questions surrounding the new federal tax credit.

Topic	October 2026 Guidance
Credit amount	Maintains the statutory $1,700 annual limit per taxpayer
Married taxpayers	Proposes treating spouses filing jointly as separate taxpayers for the credit limit with a total of $3,400 for married couples filing jontly.
Qualified contributions	Proposes requiring an explicit designation when the contribution is made
Student eligibility	Proposes more detailed household income and verification rules
SGO participation	Provides organizational and state-list implementation procedures
Reporting	Outlines donor acknowledgments, reporting, and recordkeeping requirements

These details matter because they help participants understand how a contribution may qualify and how scholarship funding should be administered.

1. Married Couples Could Qualify for Up to $3,400

One significant clarification addresses married taxpayers filing jointly.

The proposed rules treat each spouse as a separate taxpayer when applying the $1,700 annual credit limit.

Under this interpretation, a qualifying couple could potentially receive up to $3,400 in combined credits if each spouse makes sufficient qualifying contributions.

This is a proposed interpretation rather than a final regulatory provision.

Taxpayers should consult their tax advisors before relying on it.

2. Contributors Would Need to Designate Qualified Contributions

The proposed regulations explain how taxpayers would identify contributions intended for the federal credit.

Under the proposal, a taxpayer must designate the contribution as a qualified Section 25F contribution when making it.

The designation would be irrevocable.

The proposal also clarifies accepted cash payment methods, including checks and electronic transfers, while excluding digital assets.

These distinctions would help ensure contributions are documented and administered correctly.

3. Student Income Verification Would Become More Specific

Federal law limits scholarship eligibility to students in households with income at or below 300% of area median gross income. The proposed regulations provide additional detail on how geographic income levels and income verification would work. They also propose simplified verification methods for certain families receiving means-tested assistance.

4. Scholarship Granting Organizations Face New Operational Requirements

The regulatory package also addresses how states and SGOs participate.

The temporary regulations establish important procedures for state participation, SGO certification, and information reporting.

The proposed regulations address additional operational details, including contribution records, taxpayer identification, acknowledgments, and other administrative requirements.

These safeguards are intended to support accountability as the initiative begins.

5. Some Questions Still Require Further Guidance

The October regulatory package does not resolve every implementation question.

Treasury and the IRS have identified the need for further guidance regarding which educational expenses qualify under the relevant federal tax provisions.

Meanwhile, the proposed regulations remain open for public comment through December 1, 2026.

A public hearing is scheduled for December 15, 2026, subject to the agency’s hearing procedures.

Stakeholders should distinguish between the enacted statute, temporary regulations, and proposals that may be revised.

What Does This Mean for 2027?

The October guidance represents an important step toward implementation.

Taxpayers have more information about contribution requirements and potential credits. Families have additional insight into scholarship eligibility. States and SGOs have a more defined framework for participation.

For more than 25 years, ACE Scholarships has helped expand educational opportunities for K-12 students.

As the EFTC initiative develops, ACE’s experience supporting families and administering scholarships provides a foundation for helping partners navigate the changing landscape.

Explore the EFTC initiative at educationfreedom.org to understand how it can help make more educational opportunities possible in 2027.