The U.S. Treasury Department and the IRS on Thursday issued proposed regulations that would end federal tax-exempt status for thousands of private schools that use race to influence admissions or student aid, a move experts say could threaten the tax break households receive on donations to those institutions, according to CNBC.
The rules, if finalized, would take effect for taxable years beginning on or after May 31, 2027, and apply to as many as 18,000 private schools, including colleges, universities, trade schools, elementary schools, and other programs currently qualifying for tax-exempt status, the agencies estimated.
Treasury Secretary Scott Bessent said the proposal establishes a clear standard, adding that institutions that continue to use discriminatory practices will no longer enjoy the benefits of federal tax-exempt status. IRS CEO Frank Bisignano echoed that in a statement, saying schools that continue racial discrimination should expect to lose that status.
The proposal extends beyond admissions, covering educational policies, scholarships, loans, athletics, and other school-administered programs, according to the Treasury news release. Schools that select students based on religion are not affected.
Experts see the move as part of a broader Trump administration effort to dismantle diversity, equity, and inclusion policies in education. Denise Forte, president and CEO of EdTrust, said the administration is using federal power to punish schools for working to remove barriers to opportunity for students of color, arguing that recognizing barriers is not discrimination.
Potential impact on donations
A key consequence of losing 501(c)(3) status is that donations to affected schools may no longer qualify for a tax deduction. Joe Rosenberg, a senior fellow at the Urban-Brookings Tax Policy Center, said stripping that status would largely remove deductibility of contributions to those organizations.
The potential loss could be significant. U.S. individual giving to educational institutions rose more than 11% in 2025 from the prior year, according to Giving USA’s annual report. Jamie Beaton, CEO of Crimson Education, said large domestic donations from U.S. citizens would likely fall meaningfully under the proposed tax changes.
Uncertainty remains over how many taxpayers could lose the deduction if the rules are finalized. The number of households itemizing deductions has declined sharply since the 2017 tax law doubled the standard deduction and capped state and local tax deductions. Roughly 12 million tax returns itemized in tax year 2024, about 8.5% of returns, per IRS data.
However, the tax law passed last year by Republicans — the so-called “big beautiful bill” — introduced a new above-the-line charitable deduction of up to $1,000 for single filers and $2,000 for married couples filing jointly, making cash contributions deductible even for those who do not itemize.
Scholarship complications
Treasury and IRS also warned that the financial reach could extend to about 750,000 students who attend affected schools and might qualify for scholarships allocated based on racial, ethnic, or national identity.
Troy Lewis, a CPA and accounting professor at Brigham Young University, noted that scholarship funds with race-based eligibility “strings attached” could create tricky compliance issues. Schools may need to work with donors or their heirs to modify such funds to meet the new requirements.
Still, Lewis doubts the impact will hit most donors. “These proposed regulations place real pressure on these schools to change their admission, scholarship, and other policies to retain their tax-exempt status,” he said. “I suspect Treasury assumes most schools will do so.”
How the federal government would enforce the rules and strip tax-exempt status remains unclear, but the proposal marks a significant step in the administration’s campaign against race-conscious practices in education.
Source: www.cnbc.com — https://www.cnbc.com/2026/09/03/treasury-irs-proposal-tax-exempt-schools-charitable-donations.html
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