School Freedom Act of 2026

530B. School Freedom Accounts

(a) Treatment of accounts

(1) In general. A School Freedom Account is exempt from taxation under this subtitle unless such account has ceased to be a School Freedom Account. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).

(2) Account Terminations. Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to School Freedom Accounts, and any amount treated as distributed under such rules shall be treated as not used to pay qualified expenses.

(b) Treatment of contributions

(1) Deduction for contributions by parents of account beneficiary. In the case of a contribution to a School Freedom Account made by a parent of the beneficiary of such Account during the taxable year (other than any contribution to which paragraph (2) applies), there shall be allowed to such parent a deduction for such taxable year an amount equal to such contribution.

(2) Exclusion of employer contributions. In the case of an employee who is the parent of a beneficiary of a School Freedom Account, gross income of such employee (and of such beneficiary) does not include amounts contributed by such employee’s employer to such Account.

(c) Treatment of distributions

(1) Amounts used for qualified expenses. Any amount paid or distributed out of a School Freedom Account which is used exclusively to pay qualified expenses of any account beneficiary shall not be includible in gross income.

(2) Inclusion of amounts not used for qualified expenses. Any amount paid or distributed out of a School Freedom Account which is not used exclusively to pay the qualified expenses of the account beneficiary shall be included in the gross income of such beneficiary.

(3) Penalties for distributions not used for qualified expenses

(A) Penalties

(i) Tax penalties. The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a School Freedom Account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by—

(I) in the case of the first such payment or distribution, 20 percent of the amount which is so includible, and

(II) in the case of any subsequent such payment or distribution, 50 percent of the amount which is so includible.

(ii) Criminal penalties. In the case of the third payment or distribution to which clause (i) applies (and each such payment or distribution subsequent to such third payment or distribution), in addition to any penalty imposed under clause (i), such beneficiary may be imprisoned for up to 1 year for each such payment or distribution.

(B) Exception for Disability or Death. Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies.

(4) Special rule for minors. In the case of any account beneficiary who has not attained age 18—

(A) paragraphs (2) and (3) shall be applied by substituting the individual who authorized such distribution on behalf of the account beneficiary for such beneficiary each place it appears, and

(B) clauses (i) and (ii) of paragraph (3)(A) shall be applied separately with respect to each such individual who authorizes distributions on behalf of an account beneficiary.

(5) Treatment after Death of Account Beneficiary

(A) Treatment if designated beneficiary is spouse. If the account beneficiary’s surviving spouse acquires such beneficiary’s interest in a School Freedom Account by reason of being the designated beneficiary of such account at the death of the account beneficiary, such School Freedom Account shall be treated as if the spouse were the account beneficiary.

(B) Other Cases

(i) In general. If, by reason of the death of the account beneficiary, any person acquires the account beneficiary’s interest in a School Freedom Account in a case to which subparagraph (A) does not apply—

(I) such account shall cease to be a School Freedom Account as of the date of death, and

(II) an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such beneficiary, in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such beneficiary, in such beneficiary’s gross income for the last taxable year of such beneficiary.

(ii) Special Rules

(I) Reduction of inclusion for predeath expenses. The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date.

(II) Deduction for estate taxes. An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent’s spouse) with respect to amounts included in gross income under clause (i) by such person.

(d) Definitions. For purposes of this section—

(1) School Freedom Account. The term School Freedom Account means a School Freedom Account within the meaning of section 3 of the School Freedom Act of 2026.

(2) Qualified expenses. The term qualified expenses means the expenses described in section 3(f)(1) of the School Freedom Act of 2026. Any distribution required to be made to a local educational agency under section 3 of the School Freedom Act of 2026 shall be treated as used for qualified expenses.

530C. Higher Education and Skills Obtainment Funds

(a) Treatment of accounts

(1) In general. A Higher Education and Skills Obtainment Fund is exempt from taxation under this subtitle unless such account has ceased to be a Higher Education and Skills Obtainment Fund. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).

(2) Account Terminations. Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to Higher Education and Skills Obtainment Fund, and any amount treated as distributed under such rules shall be treated as not used to pay qualified expenses.

(b) Treatment of distributions

(1) Amounts used for qualified expenses. Any amount paid or distributed out of a Higher Education and Skills Obtainment Fund which is used exclusively to pay qualified expenses of any account beneficiary shall not be includible in gross income.

(2) Inclusion of amounts not used for qualified expenses. Any amount paid or distributed out of a Higher Education and Skills Obtainment Fund which is not used exclusively to pay the qualified expenses of the account beneficiary shall be included in the gross income of such beneficiary.

(3) Penalties for distributions not used for qualified expenses

(A) Penalties

(i) Tax penalties. The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a Higher Education and Skills Obtainment Fund of such beneficiary which is includible in gross income under paragraph (2) shall be increased by—

(I) in the case of the first such payment or distribution, 20 percent of the amount which is so includible, and

(II) in the case of any subsequent such payment or distribution, 50 percent of the amount which is so includible.

(ii) Criminal penalties. In the case of the third payment or distribution to which clause (i) applies (and each such payment or distribution subsequent to such third payment or distribution), in addition to any penalty imposed under clause (i), such beneficiary may be imprisoned for up to 1 year for each such payment or distribution.

(iii) Prior non-qualified distributions from School Freedom Account taken into account. For purposes of clauses (i) and (ii), any payment or distribution from a School Freedom Account to which section 530B(c)(3)(A)(i) applies shall be treated as payment or distribution to which clause (i) of this subparagraph applies if such School Freedom Account was converted into the Higher Education and Skills Obtainment Fund with respect to which clause (i) applies.

(B) Exception for distribution of Parental SFA Funds. Subparagraph (A) shall not apply to distributions properly attributable (as determined under regulations or other guidance issued by the Secretary) to Parental SFA Funds transferred to the Higher Education and Skills Obtainment Fund under section 4(a)(3) of the School Freedom Act of 2026.

(C) Exception for Disability or Death. Subparagraph (A) shall not apply if the payment or distribution is made after such beneficiary becomes disabled within the meaning of section 72(m)(7) or dies.

(4) Special rule for minors. In the case of any account beneficiary who has not attained age 18—

(A) paragraphs (2) and (3) (other than paragraph (3)(C)) shall be applied by substituting the individual who authorized such distribution on behalf of the account beneficiary for such beneficiary each place it appears, and

(B) clauses (i), (ii), and (iii) of paragraph (3)(A) shall be applied separately with respect to each such individual who authorizes distributions on behalf of an account beneficiary.

(5) Treatment after Death of Account Beneficiary

(A) Treatment if designated beneficiary is spouse. If the account beneficiary’s surviving spouse acquires such beneficiary’s interest in a Higher Education and Skills Obtainment Fund by reason of being the designated beneficiary of such account at the death of the account beneficiary, such Higher Education and Skills Obtainment Fund shall be treated as if the spouse were the account beneficiary.

(B) Other Cases

(i) In general. If, by reason of the death of the account beneficiary, any person acquires the account beneficiary’s interest in a Higher Education and Skills Obtainment Fund in a case to which subparagraph (A) does not apply—

(I) such account shall cease to be a Higher Education and Skills Obtainment Fund as of the date of death, and

(II) an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such beneficiary, in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such beneficiary, in such beneficiary’s gross income for the last taxable year of such beneficiary.

(ii) Special Rules

(I) Reduction of inclusion for predeath expenses. The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date.

(II) Deduction for estate taxes. An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent’s spouse) with respect to amounts included in gross income under clause (i) by such person.

(c) Definitions. For purposes of this section—

(1) Higher Education and Skills Obtainment Fund. The term Higher Education and Skills Obtainment Fund means a Higher Education and Skills Obtainment Fund within the meaning of section 4 of the School Freedom Act of 2026.

(2) Qualified expenses. The term qualified expenses means the expenses described in section 4(c) of the School Freedom Act of 2026. Any distributions returned to the Treasury under section 4(e)(1) of School Freedom Act of 2026 shall be treated as used for qualified expenses.

(22) School Freedom Accounts. The deduction allowed by section 530B(b)(1).

Sec. 530B. School Freedom Accounts. Sec. 530C. Higher Education and Skills Obtainment Funds.