What Is The Carried-Interest Tax Loophole Trump Wants To Close?

The 2016 presidential race was one of the most divisive in history. However, even though the campaign was heated at times, there actually were a handful of ideas on which Donald Trump and Hillary Clinton found common ground.

One of those ideas was closing the carried-interest tax loophole.

Trump has been very clear about his intent to significantly lower the tax burden on U.S. corporations and most individual taxpayers. However, a handful of wealthy fund managers may no longer be able to maneuver their way into a lower tax rate than the average American.

The Carried-Interest Tax

Here’s how the carried-interest tax loophole works: Most Americans earn income that is taxed at a progressive rate of up to 39.6 percent. Fund managers, on the other hand, earn the majority of their annual income based on the returns their funds generate. Typically, fund managers are paid a sizable portion of a fund’s annual returns. This payment may be around 20 percent of the fund’s profits, which can amount to millions of dollars. Because of the carried interest loophole, these payments are taxed as capital gains rather than income.

The long-term capital gains tax rate is currently capped at just 20 percent.

In other words, billionaire fund managers, such as Warren Buffett, pay a significantly lower tax rate than an American earning $40,000 in income per year.

Trump has pledged to “get rid of” carried interest. If he follows through on his promise, fund managers may be the only members of the financial community to be worse-off during the Trump presidency.

Since Election Day, the Financial Select Sectors SPDR Fund XLF is up 16.6 percent.