Domestic Taxes

Democrats announce deal on extenders, tax on hedge fund income

Senate Finance Chairman Max Baucus (D-Mont.) and House Ways and Means Chairman Sandy Levin (D-Mich.) on Thursday said they’d reached a deal on legislation extending several tax and spending measures through the end of this year.

The American Jobs and Closing Tax Loopholes Act will be released Thursday as the House Amendment to the Senate Amendment to H.R. 4213, the two said.

{mosads}The bill extends several popular individual and business tax breaks, which are partly paid for by increasing taxes on a common form of income used by hedge fund managers to pay themselves. Levin and Baucus reached a compromise on how to tax “carried interest” which had been a divisive issue for years.

The bill also will prevent a cut in physician payments from going into
effect for the next three years, and will instead offer some payment

On the hedge fund issue, the compromise reached essentially blends two different ways of taxing carried interest income.

The bill would change the tax code so some carried interest income would be taxed as ordinary income, which could be subject to a maximum tax rate of 35 percent. Carried interest is now taxed at the capital gains tax rate of 15 percent, and Levin has long called for a change in the policy.

Carried interest income that reflecs a return on invested capital, however, would continue to be taxed at the capital gains rate.

When carried interest does not reflect such a return on invested capital, the bill would require investment fund managers to treat 75 percent of that interest income as ordinary income. The other 25 percent would be taxed at the lower capital gains rate.

On the Medicare issue, a summary released by Levin and Baucus indicates physicians will not see the cuts in their payments and will instead receive “reasonable updates” to rates for the rest of 2010 and in 2011.

In 2012 and 2013, rates would continue to grow if spending growth is “within reasonable limits.”

Extra money would be set aside for primary care and preventive care, which were priorities in the new healthcare law.

The Senate and House hope to move the package before leaving Washington for the Memorial Day recess, as some spending measures in the package, such as unemployment benefits, will soon expire without an extension.

Here’s the summary of the carried interest portion of the plan:

“The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund.  To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gain tax rates. However, to the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat seventy-five percent (75%) of the remaining carried interest as ordinary income.  A transition rule would apply prior to January 1, 2013.  This proposal is currently being estimated by the Joint Committee on Taxation.”

A summary of the provisions can be found at:

Julian Pecquet contributed to this story.

This story was posted at 9:40 a.m. and updated at 10:50 a.m.

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