FAQs: How the 2025 Net Investment Income Tax (“Endowment Tax”) Rate Increase Affects Harvard University

The “endowment tax” is a federal excise tax on the net investment income of certain large private universities. Introduced under the 2017 Tax Cuts and Jobs Act, it took effect in 2019.  Originally set at 1.4%, the tax initially applied to realized gains from investment assets including, but not limited to, those from the endowment.

The new federal bill passed in 2025 changes the endowment tax in three ways: it raises the endowment tax rate from 1.4% to a tiered rate that goes as high as 8%, significantly increasing the tax on affected institutions like Harvard; it changes the institutions that will be subject to the tax to those with assets that exceed $500,000 per student and with more than 3,000 tuition-paying students; and it expends the scope of the income that’s subject to tax by including certain royalties and student loan interest. For Harvard, the new rate will impact endowment distributions made available for operations as early as fiscal year 2027 (FY27).

Each dollar spent on the endowment tax is one less dollar available to support research and teaching, along with student financial aid.

Yes. The endowment generates income every year, which is distributed across Harvard to support research, educational, and charitable activities. The tax will reduce the amount available for this annual distribution, meaning there will be less funding available for scholarships, teaching, and research. 

The tax can still apply even if Harvard’s endowment loses money overall. The tax is based on Harvard’s net investment income (e.g., interest, dividends and realized gains) rather than the overall performance of the endowment. So, if Harvard generates a gain on a particular investment it sells during a year with overall negative performance, it may still owe the tax. This distinction makes the tax especially complex and potentially harmful during volatile periods.

We are continuing to work through the implications of the 2025 changes and any steps for managing the financial impact will be shared with Schools and Units in the future.