On October 1, the Treasury Department issued proposed rules for the new federal scholarship tax credit (FSTC). That same day, I wrote about how I and others had misinterpreted the implications of the Treasury’s incorporation of a definition of school from the Coverdell ESA law, which defines qualified expenses for the FSTC.
The proposed rules state, “The term school has the definition set forth in section 530(b)(3)(B) and any guidance issued thereunder.” The referenced law says, “The term ‘school’ means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.” Most observers have taken this to mean homeschoolers in states that don’t define it as a school would not be eligible.
If you’re thinking these are very circular definitions of school, you’re right. But the important limitation isn’t the definition of “school” itself. It is the phrase “elementary education or secondary education (kindergarten through grade 12), as determined under State law.”
According to Merriam-Webster, a school is “an organization that provides instruction.” It’s not some specific building, governance model, funding source, or pedagogy. The law couldn’t use such a circular definition if it was trying to define school as something specific.
In my October 1st post, I explained my rationale for concluding that “as determined under State law” modifies “education,” not “school.”
Today, I found support for this interpretation from the IRS, of all places.
In 2018, the agency released guidance on its interpretation of elementary and secondary education expenses after Section 529 plans—tax-advantaged savings accounts originally designed for college expenses—were expanded to cover certain K–12 expenses. According to the 2018 notice, “The Treasury Department and IRS intend to issue regulations defining the term ‘elementary or secondary’ to mean kindergarten through grade 12 as determined under State law, consistent with the definition applicable for Coverdell education savings accounts in § 530(b)(3)(B).”
As far as I can tell, no additional regulations were issued following that notice. But it shows that the IRS and Treasury recognized it was elementary and secondary education (K–12) that was determined under state law, not what constitutes a school.
Since homeschooling is a legal way to satisfy compulsory K–12 education laws in every state, homeschooling expenses that fall under the FSTC’s definition of qualified expenses should be eligible for the program. Plus, this issue is bigger than just homeschoolers. In many states, students who attend microschools, hybrid schools, or other less standardized options are legally classified as homeschoolers. Eligible expenses in any of these options should qualify for these scholarships.
Every time I write about this program, I note that I don’t think the federal government should be doing it. However, since it is, it’s crucial that it be implemented with as much freedom and flexibility as the law allows.
From everything I’ve seen—the law that created the FSTC, legislation that was the precursor, statements from its sponsors, and previous IRS interpretation of what “as determined under State law” refers to—homeschoolers in every participating state are eligible for these scholarships, regardless of how homeschooling is defined in any state.
