Tommy Schultz · CEO, American Federation for Children

Both are federal tax credits. Both involve children. But they work very differently—and understanding the distinction could change how you think about your federal tax bill starting in 2027.

If you’ve heard about the new Education Freedom Tax Credit and wondered how it stacks up against the Child Tax Credit you may already be claiming, you’re not alone. The names sound similar. Both appear on your federal tax return. Both relate to families with children. But they are fundamentally different in purpose, mechanism, and who benefits.

This article lays out the key distinctions clearly—so you understand exactly what each credit does, how each works, and what opportunity the EFTC represents for taxpayers starting January 1, 2027.

What Is the Child Tax Credit?

The Child Tax Credit (CTC) is a long-standing federal tax benefit that reduces the amount of federal income tax owed by eligible parents and guardians. As of 2025, the credit is worth up to $2,000 per qualifying child under age 17, with up to $1,700 of that amount potentially refundable—meaning the IRS may issue you a refund even if your tax liability is lower than the credit amount.

The CTC is automatic. If you have a qualifying child and file a federal tax return, you claim it. There is no charitable donation required, no application, and no scholarship involved. It is simply a reduction in your federal tax bill based on the fact that you have children.

The Child Tax Credit phases out at higher income levels and is subject to congressional reauthorization, meaning its value and availability can change from year to year depending on legislation.

What Is the Education Freedom Tax Credit?

The Education Freedom Tax Credit (EFTC) is the nation’s first federal school choice tax credit. It was enacted as part of federal legislation and becomes effective on January 1, 2027. Unlike the Child Tax Credit, the EFTC is not automatic—it requires an action on your part.

The EFTC is a dollar-for-dollar federal tax credit of up to $1,700 per taxpayer. That means if you donate $1,700 to a qualified scholarship granting organization (SGO), your federal tax liability is reduced by $1,700—not a percentage of it, but the full amount. This is a fundamentally more powerful tax benefit than a deduction.

Side-by-Side Comparison

Tax Credits vs. Tax Deductions: Why It Matters

Both the CTC and the EFTC are tax credits, not tax deductions—and that distinction is critical. A tax deduction reduces your taxable income, which reduces your tax bill by only a fraction of the deduction amount depending on your tax bracket. A tax credit reduces your tax bill directly, dollar for dollar.

To make it concrete: if you’re in the 22% tax bracket and take a $1,700 deduction, you save $374. If you take a $1,700 tax credit—like the EFTC—you save the full $1,700. That’s more than four times the benefit.

How the EFTC Works, Step by Step

Because the EFTC involves a charitable contribution, it helps to understand the exact sequence of events before you file your 2027 taxes.

1. You make a charitable contribution to a qualified scholarship granting organization (SGO). The maximum contribution that generates a credit is $1,700 per taxpayer.
2. Your contribution funds scholarships for K–12 students from families at or below 300% of the area median income—covering tuition, fees, tutoring, and other qualified education expenses.
3. When you file your federal taxes, you claim a dollar-for-dollar federal tax credit of up to $1,700. The credit reduces what you owe the IRS by the full amount of your contribution, up to the limit.

The net effect for many taxpayers: a $1,700 contribution costs very little out of pocket after the tax credit—while a student who might not otherwise have access to the right school receives a meaningful scholarship.

Who Is Eligible to Use the EFTC?

Most taxpayers who owe federal income taxes are eligible to make an EFTC contribution and claim the credit. There is no income cap on the donor side. The only requirement is that you have sufficient federal tax liability to offset—since the EFTC is a non-refundable credit, it can reduce your tax bill to zero but does not generate a refund beyond that.

On the scholarship side, eligibility for student recipients is based on household income—specifically, families at or below 300% of the area median income. Approximately 90% of American K–12 students qualify.

Importantly, the EFTC is a federal credit. Even if your state has not opted in, you can still contribute to a qualified SGO operating in a participating state and claim the tax credit on your federal return. Your state’s decision does not affect your federal tax benefit.

Can You Claim Both Credits?

Yes. The Child Tax Credit and the Education Freedom Tax Credit are separate federal tax benefits. If you have qualifying children and make a contribution to a qualified SGO, you may be eligible to claim both on the same federal return. They are not mutually exclusive. As always, consult a qualified tax professional for guidance specific to your situation.

The Bottom Line

The Child Tax Credit is an automatic benefit for parents—a reduction in your tax bill based on having children. The Education Freedom Tax Credit is an action-based benefit that rewards you for making a charitable contribution to a scholarship granting organization, while simultaneously expanding educational access for families who need it most.

Both reduce your federal tax bill. But the EFTC is different in one important way: your contribution does something beyond reducing your own taxes. It funds a real scholarship for a child. That combination of financial benefit and direct community impact is what makes the EFTC unlike any federal tax credit that came before it.

The credit activates January 1, 2027. Now is the time to learn how it works, register your interest, and be ready to act when it launches.

Frequently Asked Questions