EFTC Basics | Educational Guide

How the Education Freedom Tax Credit Works: A Step-by-Step Guide

Five steps from first dollar to federal tax credit. Here’s the complete, plain-English breakdown of how the EFTC works — and what donors need to do to make the most of it.

Tommy Schultz CEO, American Federation for Children

The Education Freedom Tax Credit sounds complex. It isn’t. Five steps, from first dollar to final credit — here’s exactly how it works.

The EFTC is the first federal school choice tax credit in American history. Effective January 1, 2027, it allows eligible taxpayers to make a charitable contribution to a qualified Scholarship Granting Organization (SGO) and receive a dollar-for-dollar reduction in their federal tax liability — up to $1,700. The mechanics are simpler than they sound.

The Five Steps

Step by Step: From Gift to Credit

Step 1: Confirm you have a federal tax liability. The EFTC is non-refundable — it reduces your bill but doesn’t generate a refund beyond your liability. For most working Americans who pay federal income taxes, this isn’t a barrier. If you’re unsure, check your prior-year return or ask your tax preparer.

Step 2: Find a federally qualified SGO. Not every nonprofit generates the EFTC. The organization must be a qualified Scholarship Granting Organization that meets specific federal criteria, including distributing at least 90% of contributions as scholarships to eligible students. AFC Scholarship Fund is built to meet these requirements.

Step 3: Make your charitable contribution. Donate up to $1,700 per taxpayer per year to receive the maximum credit. The contribution is made directly to the SGO — not to the IRS, not to any government agency. It is a private charitable donation, and should be treated like one.

Step 4: Receive contribution documentation. The SGO provides written confirmation of your gift. AFC Scholarship Fund handles this as part of the standard giving process. Keep the documentation with your other tax records and share it with your preparer at filing.

Step 5: Claim the credit on your federal return. When you file your federal taxes, claim the EFTC using the appropriate IRS form. The credit reduces your federal tax liability dollar-for-dollar — if you owe $4,000 and contributed $1,700, you owe $2,300.

Free Tool

Run your numbers before you give.

Our free EFTC eligibility calculator shows your estimated credit in under two minutes.

Calculate My Credit →

What the Credit Does Not Do

Three Common Misconceptions

The EFTC does not “redirect” your taxes. Your contribution is a private charitable donation made before your taxes are filed. The credit reduces your tax liability at filing — the gift and the credit are separate events, and the gift is always private.

The EFTC is not a refundable credit. It can reduce your federal tax bill to zero but cannot generate a refund beyond your liability.

The EFTC does not replace your existing charitable deductions. However, the same contribution cannot generate both a deduction and a credit — consult a tax advisor to understand which treatment is optimal for your situation.

When to Give

Contributions must be made within the tax year for which you intend to claim the credit. For most taxpayers, this means before December 31. The EFTC is effective January 1, 2027 — meaning contributions made in tax year 2027 are the first eligible for the credit when you file your 2027 return in early 2028.

Planning ahead matters. AFC Scholarship Fund is accepting donor interest now so that those interested can give as soon as the credit activates on January 1st, 2027.

Frequently Asked Questions

When do I claim the EFTC?

You claim the credit on your federal tax return for the year in which you made the contribution. Your tax preparer or filing software will guide you through the appropriate form.

Do I need to do anything before contributing?

Confirm that you have a federal tax liability (the credit is non-refundable) and that the SGO is federally qualified. AFC Scholarship Fund can provide documentation of its qualification status.

What if I’m self-employed or own a business?

Business entities with federal tax liability may also be eligible. The specific rules depend on entity type — consult a tax advisor familiar with the EFTC for entity-specific guidance.

Is there a deadline for making my contribution?

Contributions must be made within the tax year — generally before December 31 — for which you intend to claim the credit.

Disclaimer: This article is for informational and educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are subject to change. Please consult a qualified tax professional regarding your individual circumstances. The Education Freedom Tax Credit is effective January 1, 2027. Contribution limits and program details are subject to IRS guidance and final program rules.