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The Education Freedom Tax Credit Program: Alabama’s Part in the Federal SGO Program

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  • The Education Freedom Tax Credit Program: Alabama’s Part in the Federal SGO Program
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Congress has enacted a federal tax credit — The Education Freedom Tax Credit — that provides a dollar-for-dollar federal income tax credit for taxpayers who contribute to Scholarship Granting Organizations (SGOs) beginning in 2027. These contributions to SGOs will fund K-12 education expenses incurred at or provided by public, private, or religious schools. This new federal tax credit closely resembles the Alabama Accountability Act (AAA) Tax Credit Program.

How does the tax credit work for individuals?

  • Taxpayers will receive a non-refundable federal income tax credit for donations to SGOs.
  • The credit is limited to $1,700 per year for individual ($3,400 for married filing joint).  
  • The tax credit is available to taxpayers in all 50 states and is on a first-in, first-out basis.
  • Taxpayers in other states could potentially donate to Alabama SGOs to take advantage of the federal credit if their state has not opted into the program.

How does Alabama participate?

  • On January 16, 2026, Governor Kay Ivey signed Executive Order No. 742, naming the Alabama Department of Revenue (ALDOR) as the administering agency and formally opting Alabama into the program.

Who is eligible for Education Freedom Scholarships under the program?

What can Education Freedom Scholarships be used for?

  • Qualified elementary and secondary education expenses that include:
    • Tuition and fees
    • Academic tutoring
    • Special needs services for special needs beneficiaries
    • Books, supplies, and equipment

Additional guidance is anticipated on potential further eligible expenses.

What are the requirements to be an Alabama SGO in the Education Freedom Scholarship Program?

  • An Alabama SGO must be a 501(c)(3) nonprofit (that is not a private foundation).
  • An Alabama SGO must provide scholarships to 10 or more students that attend different schools.
  • An Alabama SGO must use at least 90% of the income received on student scholarships.
  • An Alabama SGO cannot provide scholarships for any expenses other than qualified elementary or secondary expenses.
  • An Alabama SGO cannot earmark funds for specific students.
  • An Alabama SGO will only be able to provide scholarships to students in Alabama.
  • Alabama SGOs must be certified by ALDOR to participate.

When will we know more?

  • On January 27, 2026, the U.S. Department of Education and the U.S. Treasury Department released a joint fact sheet on the Education Freedom Tax credit.
  • ALDOR is awaiting additional guidance for the program from the Treasury Department.