Treasury and IRS proposals threaten school gift tax deductions

The U.S. Treasury Department and IRS on Thursday announced proposed regulations that would eliminate federal tax-exempt status for thousands of private schools that use race to influence factors such as enrollment and student aid.

Experts say such a move could eliminate tax breaks that households currently receive for donations to universities and other schools, and could also affect scholarships for students at those schools.

If finalized, the regulations would apply to tax years beginning after May 31, 2027.

The Trump administration had previously threatened to revoke the tax-exempt status of any school, including Ivy League schools, based on claims that the school promotes discrimination in its application process following a Supreme Court ruling that declared race-based admissions unconstitutional.

Experts said the proposal is the latest move by the White House to crack down on policies that support diversity, equity and inclusion, also known as DEI.

Treasury Secretary Scott Bessent said the Trump administration’s proposed rules are aimed at eradicating racial discrimination in the U.S. education system.

“The regulations proposed by the Treasury Department and the IRS today establish clear standards that will prevent institutions that continue discriminatory practices from receiving the benefits of federal tax-exempt status,” Bessent said in a press release Thursday.

Federal law provides tax-exempt status under Section 501(c)(3) to organizations that operate solely for charitable and educational purposes.

The proposed regulations could affect up to 18,000 private schools in the United States that currently have tax-exempt status, including colleges, universities, trade schools, vocational schools, and elementary schools, according to estimates from the Treasury Department and the IRS.

Additionally, the rules “apply across admissions, education policy, scholarships and loans, athletics, and other school administration or school support programs,” according to a news release from the Treasury Department.

“Private educational institutions that promote discriminatory practices will no longer benefit from federal tax-exempt status,” IRS CEO Frank Bisignano said in a news release Thursday. “Today’s proposed regulations should send a warning to educational institutions, and schools that continue to be segregated should expect to lose their status.”

The proposal would not affect schools that select students based on religion.

Experts say the tax proposal is related to other moves by federal agencies to eliminate DEI programs in educational institutions.

“The Trump administration’s latest proposal threatens to use the power of the federal government to punish schools and universities that have done what we should expect them to do: recognize barriers to opportunity and work to remove them,” said Dennis Forte, president and CEO of EdTrust, a research and advocacy group.

“Addressing racial inequality is not discrimination,” Forte said. “Students of color continue to face real and persistent barriers to educational opportunities. Recognizing those barriers and threatening an institution’s tax-exempt status does nothing to make education more equitable.”

One potential consequence of this proposal is that donations to schools that ultimately lose their tax-exempt status could no longer qualify for tax breaks.

“Significant domestic donations from Americans will be significantly reduced by this proposed tax reform,” said Jamie Beaton, co-founder and CEO of Crimson Education, a university consulting firm.

Tax deductions for charitable donations make donations more economically advantageous for taxpayers and help promote philanthropy. U.S. individual donations to educational institutions increased more than 11% in 2025 from the previous year, according to Giving USA’s annual report released in June.

Joe Rosenberg, a senior fellow at the Urban-Brookings Tax Policy Center, a think tank, said losing 501(c)(3) status “will largely eliminate the deductibility of (taxpayer contributions) to these organizations.”

It’s unclear how many taxpayers will lose their tax credits if the rule is finalized.

But a tax law passed last year by Republican lawmakers expanded the range of taxpayers eligible for tax deductions on such donations. The so-called “big, beautiful bill” included a new charitable deduction worth up to $1,000 for single taxpayers and $2,000 for married couples filing joint tax returns.

Previously, taxpayers could typically claim a tax deduction for charitable contributions only if they itemized the deduction on their tax return, rather than claiming the standard deduction.

But the new tax cuts in the Big and Beautiful Bill only apply to cash gifts and apply more broadly. Taxpayers can claim it without having to itemize.

The 2017 tax law, enacted by Republicans during President Trump’s first term, narrowed the number of households that could itemize deductions on their tax returns.

The prevalence of statement statements has fallen from about 30% of tax returns before the 2017 tax law to about 10% today, Rosenberg said.

According to the latest data from the IRS, about 12 million tax returns for the 2024 tax year will itemize deductions, representing about 8.5% of returns for that year.

“We’re seeing a significant drop in the number of individuals itemizing their deductions and claiming large charitable deductions,” Rosenberg said.

That’s because the law doubles the standard deduction, raises the threshold above which it makes fiscal sense to itemize, and makes changes like limiting the size of state and local tax credits and other tax deductions, Rosenberg said.

Beyond taxes, the IRS and Treasury Department said in their proposal that the economic impact of the rule could extend to the 750,000 students who attend these schools and may qualify for scholarships allocated based on “racial, ethnic, or national identity.”

Troy Lewis, a certified public accountant and professor of accounting and taxation at Brigham Young University, said older scholarship funds that were established with “conditionality” are likely to create “one of the most troubling situations.”

“For example, if a donor institutes race-based eligibility requirements for a scholarship, schools will need to figure out how to modify the scholarship to comply,” Lewis wrote in an email. The Treasury proposal itself “highlights the possibility that schools may have to work with donors (or their heirs) to find solutions,” he said.

Of course, it’s unclear how the federal government will ultimately crack down on private school misconduct, or whether it will actually strip private schools of their 501(c)(3) status.

Ultimately, the potential tax impact is “significant,” Lewis said, but relatively few donors to these schools may be negatively affected.

“These proposed regulations would place substantial pressure on these schools to change their admissions, scholarships, and other policies to maintain their tax-exempt status,” Lewis said. “I think Treasury is assuming that most schools will do that.”