Scholarship Tax Credit Guidance Previewed
Published July 3, 2026
The Department of the Treasury recently previewed forthcoming guidance implementing the new federal Education Freedom Tax Credit (EFTC) enacted as part of the Working Families Tax Cuts Act, providing an early roadmap for states, scholarship-granting organizations (SGOs), taxpayers and advisors preparing for the program's anticipated January 2027 launch.
Treasury officials indicated that proposed regulations are expected by the end of September 2026 and that taxpayers and participating entities will generally be permitted to rely on those proposed regulations for the 2027 tax year. Under the statutory framework outlined by the Treasury, participation by states is voluntary. States choosing to participate will submit to the IRS a list of eligible SGOs operating within their jurisdictions.
Taxpayers who make qualified contributions to approved SGOs may claim a federal income tax credit, subject to statutory limitations and regulatory requirements. SGOs, in turn, will use those contributions to provide scholarships to eligible students within the state for qualified K-12 educational expenses.
The Treasury emphasized that the forthcoming guidance would focus heavily on state participation procedures, SGO qualification standards, taxpayer eligibility requirements, reporting obligations, compliance procedures and program integrity safeguards. According to the Treasury, the objective is to provide stakeholders with a sufficiently detailed framework to permit operational planning well in advance of the credit's effective date. Organizations interested in participating should closely monitor forthcoming Treasury and IRS guidance and begin evaluating operational, compliance and reporting systems necessary to administer scholarship programs under the new federal framework.
Guidance Issued for Child IRA Accounts
The Treasury Department and the Internal Revenue Service (IRS) recently issued guidance regarding the new child IRA accounts, also known as "Trump Accounts." In Revenue Procedure 2026-25, the IRS created a gift tax reporting safe harbor that eliminates a significant administrative concern surrounding contributions to these accounts.
According to the guidance, qualifying contributions by individuals to these accounts will not require the filing of a federal gift tax return, provided certain conditions are satisfied. This guidance is intended to reduce compliance burdens on parents, grandparents and others who wish to contribute to a child's account.
“By granting this relief, the IRS has responded to concerns raised by taxpayers who planned to make contributions to a Trump account but worried such donations would trigger the gift tax reporting rules,” said IRS Chief Executive Officer Frank J. Bisignano. “The relief granted will reduce the potential burden placed on friends and family who want to put money into a Trump account.”
The uncertainty arose because contributions to Trump Accounts could have potentially been characterized as gifts of future interests. Future interest gifts generally do not qualify for the annual gift tax exclusion and, therefore, may require gift tax reporting even though no gift tax is ultimately due. Under the new safe harbor rules, the IRS will treat qualifying contributions as completed gifts instead of future interest gifts, making them eligible for the annual gift tax exclusion. The annual gift tax exclusion amount in 2026 is $19,000, indexed for inflation.
The safe harbor applies only to individual donors and only if the donor's taxable gifts during the calendar year consist exclusively of cash contributions to one or more Trump Accounts. Contributions must be made in cash, including by check, money order or an electronic funds transfer and must be completed before the beneficiary reaches age 18.
As a reminder, Trump Accounts generally may receive contributions from parents or other individuals, employers of those with eligible dependents, charities and governmental entities, subject to an annual contribution limit of $5,000 per beneficiary, indexed for inflation beginning after 2027. The federal government will also make a one-time $1,000 contribution for eligible children born between January 1, 2025, and December 31, 2028, if a timely election is made.
Charitable Deduction Lacks Substantiation
In Wells v. Commissioner, T.C. Memo. 2026-49, the United States Tax Court held that taxpayers were not entitled to claim more than $4.4 million in charitable contribution deductions because they failed to obtain a contemporaneous written acknowledgment (CWA) satisfying the strict requirements of Internal Revenue Code Section 170(f)(8). The Court did not impose accuracy-related penalties due to good-faith reliance on professional advice.
The case involved a 2016 contribution of real property formerly operated as a private boarding school. The donor entity transferred the property to the charitable organization and claimed a charitable deduction of approximately $4.4 million, which generated carryforward deductions claimed by the taxpayers in later years. The carryforward deductions for years 2019, 2020 and 2021 were at issue.
The taxpayers obtained an acknowledgment letter from the charity and submitted Form 8283. The documentation failed to expressly state whether the charity had provided any goods or services in exchange for the contribution, a required element of a valid CWA under Section 170(f)(8). The taxpayers argued that various documents when taken together, including the deed, donation letter, appraisal materials and acknowledgment letter, satisfied the statutory requirements.
The Tax Court rejected these arguments and reaffirmed the strict compliance standard applicable to charitable contribution substantiation. While acknowledging that multiple documents may collectively constitute a valid CWA, the Court emphasized that the relevant documents must be executed or otherwise acknowledged by the donee organization.
The Court made the distinction that documents prepared solely by the donor, even when the donor maintained a close relationship with the charity, could not satisfy the statutory requirements. The Court further reiterated that the doctrine of substantial compliance does not apply to the CWA requirements of Section 170(f)(8). Further, taxpayers cannot cure defective substantiation by later proving the underlying facts that should have been included in the acknowledgment.
The Court found that taxpayers had acted with reasonable cause and in good faith by relying on the advice of a CPA, who had provided incorrect guidance regarding the required contents of the CWA. Because the taxpayers sought professional advice, provided complete information to their advisor and followed the advisor's instructions, the court declined to impose Section 6662 accuracy-related penalties despite disallowing the entire charitable deduction.
Editor’s Note: This case serves as another cautionary reminder that charitable contribution substantiation requirements are strict. CWAs for gifts of $250 or more should explicitly address all statutory requirements, including the often-overlooked statement regarding whether any goods or services were provided in exchange for the contribution.
Applicable Federal Rate of 5.2% for July: Rev. Rul. 2026-12; 2026-28 IRB 1 (15 June 2026)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2026. The AFR under Sec. 7520 for the month of July is 5.2%. The rates for June of 5.0% or May of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
