Trump admin targets tax-exempt status at private colleges — threatening a key tax break for donations

The U.S.

Treasury Department and the IRS issued proposed regulations on Thursday to end federal tax-exempt status for thousands of private schools that use race to influence factors like admissions or student aid.

Such a move threatens to remove a tax break that households currently receive on donations to universities and other schools, and may also affect scholarships for students of these schools, according to experts. The regulations, if finalized, would apply to taxable years beginning on or after May 31, 2027.

The Trump administration had previously threated to revoke tax-exempt status from any school, including those in the Ivy League, based on claims that they have fostered discrimination in their application processes in the wake of the Supreme Court's decision declaring race-conscious admissions unconstitutional.

Experts said the proposal is the latest move by the White House to clamp down on policies supporting diversity, equity and inclusion, also known as DEI. Treasury Secretary Scott Bessent said the Trump administration's proposed rules were meant to root out racial discrimination in U.S. education system.

"Today's Treasury and IRS proposed regulations establish a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status," Bessent said in a press release on Thursday.

Proposal would impact about 18,000 schools Federal law provides tax-exempt status under section 501(c)(3) to organizations that operate exclusively for charitable and educational purposes.

The proposed regulations may affect as many as 18,000 private schools, including colleges, universities, professional schools, trade schools, elementary schools and others in the U.S. that currently qualify for tax-exempt status, the Treasury Department and IRS estimated.

Further, the rules "would apply across admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program," according to the Treasury's news release.

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"Today's proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status." The proposal doesn't impact schools that select students based on religion. The tax proposal is related to other moves taken by federal agencies to dismantle DEI programs at educational institutions, experts said.

"The Trump administration's latest proposal threatens to use the power of the federal government to punish schools and colleges for doing what we should expect them to do: recognize barriers to opportunity and work to remove them," said Denise Forte, president and CEO of EdTrust, a research and advocacy organization. "Addressing racial inequity is not discrimination," Forte said.

"Students of color continue to face real and persistent barriers to accessing educational opportunities. Threatening the tax-exempt status of institutions for recognizing those barriers does nothing to make education fairer."

Trump administration rules threaten tax break for donations One potential consequence of this proposal is that donations made to schools that ultimately lose tax-exempt status may no longer qualify for a tax break. "Large domestic donations from U.S. citizens would fall meaningfully with these proposed tax changes," said Jamie Beaton, co-founder and CEO of Crimson Education, a college consulting firm.

The tax deduction for charitable donations can make giving more financially advantageous for taxpayers and help drive philanthropy. U.S. individual giving to educational institutions rose more than 11% in 2025 from the previous year, according to Giving USA's annual report released in June.

Losing 501(c)(3) status "would by and large remove deductibility [of taxpayer contributions] to those organizations," said Joe Rosenberg, a senior fellow with the Urban-Brookings Tax Policy Center, a think tank. It's unclear just how many taxpayers are poised to lose a tax deduction once the rules are finalized.

But the tax law passed last year by Republican lawmakers expanded the pool of taxpayers eligible for a tax deduction on such contributions. The so-called "big beautiful bill" included a new charitable deduction worth up to $1,000 for single tax filers or $2,000 for married couples who file a joint tax return.

Previously, taxpayers had only generally been able to claim a tax deduction for their charitable contributions if they itemized deductions on their tax return, rather than claim a standard deduction. But the new tax break in the "big beautiful bill," which is only eligible for cash gifts, applies more broadly: Taxpayers can claim it even if they don't itemize.

A 2017 tax law enacted by Republicans during Trump's first term in office narrowed the number of households that itemize deductions on their tax returns. The prevalence of itemization fell from about 30% of tax returns before the 2017 tax law to roughly 10% today, Rosenberg said.

About 12 million tax returns itemized their deductions in tax year 2024, about 8.5% of returns that year, according to 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.

That's because the law doubled the standard deduction — thereby raising the threshold over which it makes sense financially to itemize — and made other changes like restricting the size of the state and local tax deductions and other tax breaks, Rosenberg said.

Scholarships may also be at risk Beyond taxes, the IRS and Treasury said in their proposal that the financial impact of the rules may also extend to the 750,000 students who attend these schools and who may qualify for scholarships allocated on the basis of "racial, ethnic, or national identity."

Troy Lewis, a certified public accountant and professor of accounting and tax at Brigham Young University, said old scholarship funds that were established with "strings attached" likely pose "one of the trickiest situations" "For instance, if a donor placed race-based eligibility requirements on the scholarship, the school is going to have to figure out how they can modify the scholarship to bring it into compliance," Lewis wrote in an e-mail.

The Treasury proposal "itself highlights the possibility for the school to potentially have to work with the donor (or their heirs) to find a resolution," he said. Of course, it's unclear how the federal government will ultimately police private schools for any perceived wrongdoing, and whether they will indeed strip them of 501(c)(3) status.

Ultimately, while the potential for tax consequences is "significant," Lewis said, he suspects relatively few donors to these schools will experience a negative impact. "These proposed regulations place real pressure on these schools to change their admission, scholarship, and other policies to retain their tax-exempt status," Lewis said. "I suspect Treasury assumes most schools will do so."