New Federal Tax Credit Proposed for Private School Donations: Up to $5,000 Credit, But Limited Spots Available

The "Educational Choice for Children Act of 2025" (Sec. 1) is basically a new way to fund private and religious school education using federal tax dollars, though it's framed as a tax credit. Here's the deal: If you donate to a qualified "scholarship granting organization" (think of them as middlemen funneling money to private schools), you can get a federal tax credit for that donation (Sec. 2). The scholarships these organizations hand out are also tax-free for the families who receive them (Sec. 3).

Cash for Classrooms?

The core of this bill is the tax credit. You can donate, and then write off up to $5,000, or 10% of your income (whichever is higher), on your federal taxes (Sec. 2). So, if you make $60,000 a year, you could donate $6,000 and get a credit for the full amount. But there's a catch: there's a nationwide cap of $5 billion per year for these credits, from 2025 to 2028 (Sec. 2). After that, the program sunsets, unless it's renewed. The IRS will allocate these credits on a first-come, first-served basis, and they'll even have a real-time tracking system (Sec. 2). Ten percent of the total cap is divided evenly among all states, then the rest is up for grabs (Sec. 2).

Who Benefits, Who Pays?

This bill is designed to help lower-income families afford private school. To be eligible, a student's household income has to be less than 300% of the area's median income (Sec. 2). For example, if the median household income in your area is $50,000, a family making up to $150,000 could theoretically qualify. The scholarships can cover tuition, books, tutoring, and even educational therapies – even for homeschoolers (Sec. 2). The scholarship organizations have to prioritize giving scholarships to students who've already received them, and their siblings (Sec. 2). This could make it harder for new families to get in on the action.

The Fine Print (and Potential Problems)

One big selling point of this bill is that it protects private schools, including religious ones, from government oversight (Sec. 4). This is great for school autonomy, but it also raises some red flags. With limited government oversight, what's to stop a private school from, say, discriminating against LGBTQ+ students or students with disabilities? The bill does require scholarship organizations to verify family income and conduct annual audits (Sec. 2), but there's not a lot of detail on how that income verification will work.

Another potential issue is the first-come, first-served allocation of the tax credits. What happens if families in wealthier states, or with better access to information, snap up all the credits before families in other areas even know about the program? It's not hard to imagine a scenario where this ends up widening the gap between the haves and have-nots.

Finally, the bill requires scholarship organizations to spend at least 100% of their receipts (minus administrative expenses, which are capped at 10%) on scholarships within three years (Sec. 2). They can carry over 15% to the next year. This is intended to make sure the money actually goes to students, but clever accounting could potentially still allow for some creative use of funds.

It's also worth noting that the bill effectively shifts public money towards private institutions. While the bill's sponsor, Adrian Smith, receives significant funding from industries such as Health Professionals, Insurance, and Pharmaceuticals/Health Products, it's not immediately obvious how these industries would benefit. However, it is possible that a shift in public funds towards private institutions could potentially reduce the tax burden on these sectors, or create new markets for their products and services within the private education system.