Tax Policy Spotlight: Endowment Taxes on the Rise
After narrowly passing both the House of Representatives and the Senate, the “One Big Beautiful” megabill was signed into law on July 4, 2025. Among numerous other provisions, the bill contains significant changes to the tax treatment for private college endowments. The bill raises taxes on certain college endowments, which may lead many endowments to reconsider their asset allocations and investment strategies.
New Law’s Impact on Endowment Taxes
- The “One Big Beautiful” megabill increases taxes on private college and university endowments to as high as 8% for the largest endowments. The excise tax is set to go into effect in 2026 and applies to an endowment’s net investment income—which includes, for example, capital gains, dividends, and taxable interest.
- The new tax rate is up from 1.4% under the 2017 “Tax Cuts and Jobs Act,” which applied to net investment income of private college and university endowments with at least $500,000 per student and 500 students enrolled.
- Under the new law, private colleges are subject to the tax if they enroll at least 3,000 tuition-paying students and more than 50 percent of the students are located in the United States.
- The new law also subjects additional sources of private college and university endowment income to tax, including student loan interest and federally subsidized royalty income received from intellectual property developed by students and faculty.
Evolving Endowment Tax Rates
New rates apply to taxable years beginning after December 31, 2025
Asset Allocation Considerations
Endowments facing these higher tax rates that previously had opted for investments that locked up capital for multiple years will need to consider if they have sufficient liquidity to meet tax obligations each year. They may also consider reallocating assets toward more tax-efficient solutions that defer realization of gains and manage dividend income. Dimensional has been managing tax-aware assets for over 25 years, helping clients navigate an evolving tax landscape. Our experience includes:
- Transitioning assets to broadly diversified, low-turnover solutions
- Tax loss harvesting to defer capital gains and potentially lower tax bills
- Managing dividend income in line with evolving tax policy
- Customizing strategies to meet specific tax goals while managing restrictions and constraints
- Managing redemptions to meet obligations in a tax-efficient manner
Disclosures
This article is offered only for general informational purposes, does not constitute tax, or legal advice, and should not be relied on as such. Investors should consult with a tax or legal professional regarding such matters. Dimensional makes no representations as to the accuracy of, and assumes no duty to update, the information provided herein. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision.
This information is provided for registered investment advisors and institutional investors and is not intended for public use. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
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