Clock ticking on education tax credit

The U.S. Treasury Department and Internal Revenue Service released proposed regulations Oct. 1 on governing the new Education Free Tax Credit, giving states, taxpayers and scholarship organizations a detailed roadmap ahead of the program's Jan. 1 launch.

The new federal program provides taxpayers with a dollar-for-dollar, nonrefundable federal income tax credit of up to $1,700 for qualifying cash donations to approved scholarship-granting organizations.

One of the most significant clarifications involves married taxpayers.

Treasury confirmed married couples filing jointly may claim a combined credit of up to $3,400, effectively allowing each spouse to qualify for the $1,700 maximum. Unused credits may also be carried forward for up to five years.

That significantly expands the potential reach of the program.

By 2030, the Treasury and IRS estimate 600-700 scholarship-granting organizations could participate, with more than 11 million taxpayers making nearly $26 billion in qualified contributions annually. Federal officials estimate those contributions could fund as many as 2.2 million scholarships each year.

Importantly, the $1,700 limit applies to the taxpayer's credit, not to the size of an individual student's scholarship.

Scholarship funds may be used for a broad range of qualified K-12 education expenses, including private-school tuition, academic tutoring, special-needs services, books, supplies, computers and other expenses associated with a student's education.

That means the program is not limited to students attending private schools; students remaining in public schools may also qualify.

The regulations also provide important guidance for scholarship-granting organizations.

Generally, scholarship-granting organizations must be a qualified 501(c)(3) public charity, separately account for qualified contributions and comply with federal scholarship, operational and reporting requirements. The proposed rules also establish a framework allowing organizations to operate across multiple participating states.

Treasury estimates its operational safe harbor could enable roughly 450 additional organizations to participate and generate as much as $3 billion in additional annual qualified contributions.

Participation remains voluntary.

But participating states cannot use discretionary certification standards to exclude an organization that otherwise meets the federal requirements. The regulations are intended to prevent states from using the certification process to impose additional restrictions inconsistent with the federal program.

For the Mountain West, the new regulations move the program from concept toward implementation.

Idaho, Montana and Wyoming have already elected to participate for 2027 and appear on the IRS's official list of participating states.

For the first program year, participating states must submit their advance election by Jan. 1, and complete the process by submitting their lists of qualifying scholarship-granting organizations by Feb. 15.

If a state fails to submit its scholarship-granting organizations list by that deadline, organizations in that state will not qualify as SGOs for the 2027 program year.

That puts Washington state on a much shorter clock.

Gov. Bob Ferguson has not yet announced whether Washington will participate. As recently as September, his office said he remained undecided.

The release of the federal regulations resolves many of the implementation questions that states had been waiting for Treasury to answer. Washington state now has roughly three months to decide whether to make an advance election for 2027 and, if it does, begin identifying organizations that could qualify.

The choice has practical consequences for Washington families.

If Washington participates, eligible students could receive privately funded scholarships for qualifying educational expenses ranging from tutoring and special-needs services to books, technology and private-school tuition.

If Washington does not participate for 2027, Washington students would not be eligible to receive scholarships through scholarship-granting organizations certified by the state that year, while students in Idaho, Montana, Wyoming and other participating states move forward with the program.

With the federal rules now on the table and the Jan. 1 deadline approaching, Washington state's remaining question is no longer how the program will work. It is whether the Evergreen State will participate.

- Meg Goudy is the education director at the Mountain States Policy Center. Email her at mgoudy@mountainstatespolicy.org.