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What HB 1 and the federal Education Freedom Tax Credit mean for your school — and what to do right now.
What is the federal Education Freedom Tax Credit?
A provision of the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, gives individual donors a dollar-for-dollar federal tax credit of up to $1,700 per year for contributions to approved Scholarship Granting Organizations (SGOs). Married couples filing jointly can each claim the credit, for up to $3,400 per household, and unused credit carries forward up to five years. The key thing to understand is who is who: the donor makes the gift and claims the credit; the SGO pools those gifts and awards scholarships; and the family receives a scholarship for a child’s education. Your school is not the donor and will not be the SGO. Your school is where families can spend the scholarship.
What did Kentucky’s House Bill 1 do?
HB 1 opted Kentucky into the federal program. It became law on March 17, 2026, after the General Assembly overrode Governor Beshear’s veto. The law designates the Kentucky Secretary of State (currently Michael Adams) as the state’s SGO registrar, responsible for publishing regulations, approving SGOs, and reporting Kentucky’s participation to the U.S. Treasury. Without HB 1, Kentucky donors could still have claimed the credit — but only by giving to SGOs in other states, leaving Kentucky students out.
Has SGO registration opened in Kentucky yet?
Not yet, as of this writing. The Secretary of State’s office is still developing the regulations and application process for SGOs. HB 1 included an emergency clause allowing this work to begin immediately, and Secretary Adams has publicly supported the program. Kentucky’s first list of approved SGOs is due to the federal government by January 1, 2027 — the date scholarships can begin receiving donations.
If registration isn’t open, what should our school do right now?
Prepare. The schools that act now will be ready to move the moment the state’s process opens. Concretely:
- Confirm your tax-exempt status. Confirm that your school’s affiliated nonprofit holds current 501(c)(3) status — and is not classified as a private foundation — or begin that application now, since IRS determinations can take months.
- Identify a path to affiliation. Most schools cannot serve as their own SGO (see below) and will need to partner with an existing or emerging SGO, or join with other schools to help establish one.
- Engage legal counsel early. Have counsel review the federal requirements and Treasury guidance, your options for SGO affiliation or formation, and what participation does and does not obligate your school to do (see “Will participating put our school’s independence at risk?” below).
- Track the local landscape. EdChoice Kentucky is monitoring the program as the state’s SGO landscape develops and is the best single source for Kentucky-specific updates.
- Educate your community — donors and families. Tell potential donors about the $1,700 credit so they’re ready to give once an approved SGO exists, and tell parents, alumni, and prospective families that scholarships are coming. These are two different audiences with two different asks.
- Monitor the Secretary of State’s office. Watch sos.ky.gov for proposed regulations and the SGO application process.
Can our school become its own SGO?
Generally, no. Federal rules require an SGO to spend at least 90% of contributions on scholarships and to serve students who do not all attend the same school. A school directing funds only to its own students would not meet that test. Most private schools will instead partner with an existing or newly forming SGO, or work with other schools to help establish one.
What are the basic requirements for an SGO?
- Be a 501(c)(3) public charity — not a private foundation.
- Spend at least 90% of contributions on scholarships; cap administrative costs at 10%.
- Serve at least 10 students who do not all attend the same school. Students in a minimum of two schools must be served by each SGO.
- Maintain separate accounting for scholarship funds.
- Verify family income and student eligibility.
- Prioritize returning scholarship recipients, then their siblings.
- Prohibit earmarking donations for specific students, and exclude board members and major donors from receiving scholarships.
Which students are eligible for scholarships?
Students who are eligible to enroll in public school and whose household income does not exceed 300% of the area median income where they live. This threshold is deliberately broad: the Urban Institute estimates that roughly 90% of U.S. households qualify nationally. The program is built for working- and middle-class families, not only the lowest-income households.
What can scholarship funds be used for?
- Private school tuition and fees
- Books, supplies, and classroom materials
- Tutoring and special-needs services
- Computers, tablets, and technology
- Internet access for learning
- School uniforms and required attire
- Transportation to and from school
Will participating put our school’s independence at risk?
Most likely not — but it is worth understanding why, and staying alert. Because the benefit flows as a federal tax credit to donors, who give to an SGO, which then awards scholarships to families, your school is not a direct recipient of federal funds the way it would be under a government grant or a public voucher. Federal law for this program also includes provisions intended to protect the autonomy of participating private and religious schools and to limit government control over their operations. Even so, scholars at the Cato Institute and others rightly caution that federal involvement in private education can invite federal regulation over time, conditions that are modest today can be expanded by a future Congress or administration. The practical takeaway: have your counsel confirm exactly what participation requires, keep your role as an SGO partner rather than a federal grantee, and watch for changes in Treasury guidance and the underlying statute. Going in clear-eyed is the best protection for the independence that makes your school worth choosing.
Does this cost Kentucky any tax dollars?
No. The program uses a federal tax credit, not state appropriations. HB 1 does not spend state tax dollars, does not reduce SEEK funding, and does not create a new state spending program; donor contributions are redirected federal tax liability, not new public spending. It also helps to say plainly what the program is not: it is not a state voucher, it does not pull money out of public-school classrooms, and — given the 300% income ceiling — it is aimed at ordinary working families, not the wealthy.
What is the single most important thing to do this summer?
Confirm your nonprofit status and start the conversation with legal counsel about SGO affiliation. Everything else — donor and family education, identifying eligible families, watching for state regulations, protecting your autonomy — follows naturally once that foundation is in place. Schools that wait until registration opens in late 2026 may not be ready to participate in the program’s critical first year.
