Senator Majority Leader Chuck Schumer and Senator Joe Manchin introduced the Inflation Reduction Act of 2022 geared toward funding climate initiatives, and lowering the national deficit. In order to achieve this, a series of tax code changes could be underway with ‘carried interest’ being the main target.
Carried interest has long been considered a capital gain since it was introduced in 1993, therefore, it was never subject to the much larger tax rate that normal income is.
The IRS taxes carried interest as a capital gain at 23.8%, however if reclassified as regular income, it would jump to 37%.
Private equity or hedge fund bosses are given “performance fees,” as carried interest, which is essentially a share of the profits that a fund earns. The more a fund exceeds the expected minimum return, the more these managers can earn while only having to pay the minimum tax rate.
The proposing party believes that re-classifying the tax code could generate roughly $14 Billion in revenue. President Biden has shown initial support for the bill, although it still remains to be seen if it will get past the senate.