Endowment tax

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In the United States, an endowment tax is an excise tax on excessive investment income by certain tax exempt charities.

In general, non-profit charities do not pay taxes on their investment income, and donors making contributions to the charities get deductions on their personal income taxes. But unlike individuals, charities can live forever and never pay estate taxes; thus, this tax policy has the potential of allowing the accumulation of a large amount of wealth and economic power outside the tax system.

For a long time, the federal tax laws made a distinction between a private foundation (which is generally controlled by a small group -- often the descendants of the person or persons who created the foundation -- and thus has a narrow donor base often consisting of those same persons) and a public charity (which though it may have a small board, is not controlled by a single group, and has a wide-spread donor base). If a private foundation did not spend a specified portion of its savings, it was subject to an excise tax. However, public charities (such as major universities) were not taxed as private foundations. A private foundation will meet the endowment test if it normally makes qualifying distributions directly for the active conduct of its exempt activities of at least two-thirds of its minimum investment re­turn.[1]

The Tax Cuts and Jobs Act of 2017, as amended by the Bipartisan Budget Act of 2018, created an excise tax of 1.4% on endowment income levied on universities that have at least 500 tuition-paying students and net assets of at least $500,000 per student. Only two dozen institutions meet this test. The $500,000 is not adjusted for inflation, so the threshold is effectively lowered over time.[2]

In 2020, the Coronavirus Aid, Relief, and Economic Security Act provided for $12.5 billion in formula funds to colleges, at least half of which must be given directly to students. These funds were allocated based on how many students at the institution received Pell Grants for low income families. President Trump asked why Harvard University should receive corona virus relief funds if it has a $40 billion endowment, and demanded the return of the money, [3] which in fact Harvard returned.[4] In addition to this, Harvard did pay the 1.4% excise tax.


  1. Private Operating Foundation - Endowment Test. Retrieved on 2020-08-04.
  2. Wealthy colleges face uncertainty as they seek ways to avoid new endowment tax (en). insidehighered.com. Retrieved on 2020-08-04.
  3. Harvard to return $8.7M coronavirus relief funding from CARES Act (April 22, 2020). Retrieved on 2020-08-04.
  4. Harvard Statement on Decision to Not Accept Funds from the CARES Act Higher Education Emergency Relief Fund (April 22, 2020). Retrieved on 2020-08-04.