Author Topic: Carried Interest Tax Loophole  (Read 1767 times)

Joel

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Carried Interest Tax Loophole
« on: January 26, 2017, 01:47:30 PM »
Am I the only person who gets absolutely pissed off about the carried interest tax loophole?

https://www.bloomberg.com/politics/articles/2017-01-17/here-s-how-trump-could-try-to-kill-carried-interest-tax-break

Not only are these hedge fund guys charging ridiculous management fees and taking 20% of the returns, they get preferential tax treatment on the 20% of the returns they are stealing! WTF AMERICA.

MoonLiteNite

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Re: Carried Interest Tax Loophole
« Reply #1 on: January 28, 2017, 03:07:43 AM »
As  with all tax loop holes.... it will all be fixed with
https://fairtax.org/index

chasesfish

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Re: Carried Interest Tax Loophole
« Reply #2 on: January 28, 2017, 05:40:49 PM »
They're not "stealing" returns, all of their investors are required to be accredited investors and profits are distributed based upon a fund agreement.

That being said, only the pro-data profits should be treated as long-term gains.  Payouts above the prorate share of profits should be classified as a management fee and taxed as income.  It shows how powerful the lobby is, Democrats only push for it when they're not firing with live bullets (2009/2010).  Republicans are equally guilty of pushing some issues when they don't have live bullets.

I actually optimistic they might fix this a way to help pay for corporate tax reform.

Indexer

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Re: Carried Interest Tax Loophole
« Reply #3 on: January 29, 2017, 07:28:24 AM »
First, let's stop calling it a loophole. That is just an easy way for politicians to try to pass the blame for something that is unpopular. If Congress has known it was there all along then it isn't some loophole, it's the law. Per the article, this has been around since the 1920s, it's the law.

I think of it like the Backdoor Roth. If you have income restrictions on a Roth then any way to get around those income restrictions would seem like a loophole right? When congress decided to ease the restrictions around conversions it was known in advance(by Congress, the IRS, CFPs, CPAs, etc.) that it would allow high income earners to get around the income restrictions on Roth IRAs. If they knew about it in advance then it isn't a loophole. It's the law.

The hedge fund is counting their portion(normally 20%) of the returns as capital gains instead of ordinary income. I see a lot of problems with hedge funds, but this isn't one of them. The "source" of the income is from investment gains. If those investments are held longer than 1 year then they are taxed at LTCG tax rates.


Quote
Not only are these hedge fund guys charging ridiculous management fees and taking 20% of the returns, they get preferential tax treatment on the 20% of the returns they are stealing! WTF AMERICA.

I am not a fan of hedge funds. I won't invest in them nor would I recommend others do so. However, the people who are invested in them are accredited(wealthy) investors who know what they are doing. From what I've read many of them know it is likely to perform worse than a balanced portfolio of index funds. They don't care. They see their hedge fund just like their Ferrari that they never drive. It's a conversation starter with other rich people. If one of the hedge funds they are invested in does really well they have bragging rights... as long as they don't bring up how the other ones performed!

Side note: I know a lot of pensions also invest in hedge funds. Those pension managers should be fired. Why on Earth would they put people's retirement money in hedge funds? There isn't any data that I've seen to support doing that, and they are acting as fiduciaries so firing them is the logical conclusion.

Joel

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Re: Carried Interest Tax Loophole
« Reply #4 on: January 29, 2017, 09:27:17 AM »
I am not a fan of hedge funds. I won't invest in them nor would I recommend others do so. However, the people who are invested in them are accredited(wealthy) investors who know what they are doing. From what I've read many of them know it is likely to perform worse than a balanced portfolio of index funds. They don't care. They see their hedge fund just like their Ferrari that they never drive. It's a conversation starter with other rich people. If one of the hedge funds they are invested in does really well they have bragging rights... as long as they don't bring up how the other ones performed!

Side note: I know a lot of pensions also invest in hedge funds. Those pension managers should be fired. Why on Earth would they put people's retirement money in hedge funds? There isn't any data that I've seen to support doing that, and they are acting as fiduciaries so firing them is the logical conclusion.

I have no sympathy for individuals investing in hedge funds. But government pensions invest heavily in hedge funds, and that's where I get really pissed off as a taxpayer. The individuals who are the recipients of those pensions aren't to blame.

BTDretire

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Re: Carried Interest Tax Loophole
« Reply #5 on: January 29, 2017, 09:56:29 AM »
As  with all tax loop holes.... it will all be fixed with
https://fairtax.org/index

As Mustachians we should have a lot of questions at the Webinar in the above link.
 Some numbers to get you all thinking and calculating.
 I'm reading* the Fairtax as, for a family of two you get $16k tax free.
 Then all your purchases are taxed at 23%.
With the Fairtax $40k -$16k = $24k times 23% = $5,520 in taxes.
 If you are FIREd and withdraw $40k from dividends and interest, I think, taxed at 10%,
with a standard $12.6k deduction, $40k - $12.6k = $27.4k times 10% equals $2,740 in taxes.
 That make the Fairtax not look good for retires living on Interest and dividends.
Also what happens to RMDs? And a Roth vs standard IRA? Do you still pay 23% on your Roth?

* This is all very simplified and I'll be happy to see someone actually delve into it and get some
real data for actual numbers. Not a Tax preparer either.