Treasury rule could strip tax-exempt status at 18,000 private schools

The Treasury Department and the IRS proposed regulations Thursday that would revoke federal tax-exempt status from up to 18,000 private schools that use race in admissions or aid decisions, threatening the charitable deduction households claim on donations to those institutions.

"Losing 501(c)(3) status would by and large remove deductibility of taxpayer contributions to those organizations," said Joe Rosenberg, a senior fellow at the Urban-Brookings Tax Policy Center.

The rules, if finalized, would apply to taxable years beginning on or after May 31, 2027, and would cover admissions, scholarships, loans, athletics and other school-run programs. The proposal does not affect schools that select students based on religion. Treasury Secretary Scott Bessent said the rules establish a clear standard so institutions that continue discriminatory practices no longer receive the benefits of tax-exempt status.

The stakes reach donors and students. U.S. individual giving to educational institutions rose more than 11 percent in 2025, according to Giving USA's annual report. The IRS and Treasury estimate the financial impact could extend to 750,000 students who qualify for scholarships allocated on the basis of racial, ethnic or national identity.

Donation deduction narrows as itemization falls

The charitable deduction makes giving more financially advantageous for taxpayers and helps drive philanthropy. The tax law passed last year by Republican lawmakers — the "big beautiful bill" — added a charitable deduction worth up to $1,000 for single filers or $2,000 for married couples filing jointly, claimable even by taxpayers who do not itemize. Previously, taxpayers could generally claim a deduction for charitable gifts only if they itemized rather than took the standard deduction.

The 2017 tax law enacted during Trump's first term doubled the standard deduction and restricted state and local tax deductions, cutting the share of households that itemize from about 30 percent before the law to roughly 10 percent today, Rosenberg said. About 12 million tax returns itemized their deductions in tax year 2024, roughly 8.5 percent of returns, according to the most recent IRS data.

"We've seen a huge drop in the number of individuals that itemize their deductions and claim large charitable deductions," Rosenberg said.

Scholarships face compliance pressure

Beyond taxes, the rules could reshape how schools allocate aid. Troy Lewis, a certified public accountant and professor of accounting and tax at Brigham Young University, said old scholarship funds established with race-based eligibility requirements likely pose one of the trickiest situations. Schools may need to work with the donor or their heirs to modify scholarship terms to bring them into compliance, he said.

It remains unclear how the federal government will police private schools for any perceived wrongdoing, or whether it will strip 501(c)(3) status. Lewis suspects relatively few donors will experience a negative impact, since the proposal pressures schools to change admission and scholarship policies to retain their tax-exempt status.

"I suspect Treasury assumes most schools will do so," Lewis said.

The proposal is open for public comment before any final rule, and its financial consequences hinge on whether schools alter their policies in response. Households considering donations to affected institutions should verify the latest official guidance from the IRS and Treasury before claiming a deduction.

This article is for informational reference only and does not constitute professional advice.