The development comes after months of debate between policy officials, education advocates and lawmakers over whether the new school vouchers for private education will be considered federally taxable income for parents.
"Taxability in any case is going to be very rare for students," Education Deputy Commissioner Amity Schuyler told a group of lawmakers during a Monday hearing.
The debate began in November when Education Commissioner Penny Schwinn surprised lawmakers by announcing that voucher recipients would be taxed, explaining she came to that conclusion after consulting with the attorney general's office.
Yet the education agency quickly reversed its position a few days later, saying that the intent of the law was to consider these vouchers as scholarships. Officials said they would work to ensure school vouchers would not be taxable.
However, confusion has remained as the department has been instructed by Republican Gov. Bill Lee to quickly implement the program by the 2020-21 school year.
By Monday, the department told lawmakers it was still working on the issue but made no promises that families wouldn't be taxed.
According to the department, parents will risk getting taxed if they have leftover voucher funds at the end of the year. The agency expects most parents to use the majority of the money on tuition, which would exempt them from being taxed.
"We're not anticipating issuing a large number of 1099s to parents," Schuyler said, referencing the tax document used to report income other than wages or salary that some parents could receive next year.
Schuyler added that the Internal Revenue Service is silent on whether school vouchers should be taxed and they have not asked the IRS for further guidance.
Meanwhile, the pro-voucher Tennessee Federation for Children has disputed the tax interpretation.
The law says the vouchers "do not constitute income of a parent of a participating student" under Tennessee law. That doesn't affect federal taxes.
After approving the voucher proposal last year, lawmakers gathered Monday to sign off on the administrative rules that dictate how the program will be managed.
The meeting quickly became a last-minute chance for Democrats to raise objections about the voucher program, but their Republican colleagues eventually signed off on recommending on adopting the proposed rules.
Under the law, the vouchers — worth up to $7,100 annually for private education — cannot go to families whose income exceeds twice the federal income eligibility for free school lunch.
The yet-to-be-implemented program is limited to Shelby and Davidson counties.