The Internal Revenue Service scored a significant win over the hedge-fund and asset-management industries in a case that could bring higher taxes for many fund managers. The U.S. Tax Court’s ruling could require managers to pay self-employment taxes of more than 3 percent on much of their income. If the opinion survives additional legal battles and is applied broadly, it will close off a popular technique that lets them exclude millions of dollars in income from self-employment taxes and related levies that others must pay. Even though many fund managers are considered “limited partners” under state laws, that doesn’t automatically mean they qualify for an exception that limited partners get from federal self-employment taxes, ruled Judge Ronald Buch. Judge Buch said that whether fund managers count as limited partners for federal self-employment tax purposes depends on what they actually do for the fund. (The Wall Street Journal)
A tepid year for opportunity zones
Qualified opportunity zone funds tracked by Novogradac & Co., an accounting and consulting firm specializing in federal tax credits, raised just $1.11 billion in new equity during the third quarter of 2023, bringing the year-to-date total to a tepid $3.12 billion. By comparison, the 1,848 opportunity zone funds tracked by the firm raised $8.29 billion during the same period in 2022 and $5.12 billion in 2021. Novogradac reported qualified opportunity zone funds have raised $37.21 billion in equity since their launch in 2019. Since 2019, Novogradac says residential construction has been leading investments, with $7.87 billion reported raised by qualified opportunity funds focused exclusively on that area and $30.51 billion raised by qualified opportunity funds that have partial focus on residential investment. Second is commercial development with $2.20 billion raised by commercial-only qualified opportunity funds and $24.73 billion raised by qualified opportunity funds with partial focus on commercial development. (DI Wire)
Supreme Court wary of remaking income tax
The Supreme Court looked unlikely to impose strict new limits on Congress’s power to tax income, with some conservative and liberal justices alike signaling wariness about upending long-settled principles of the federal tax code. The arguments involved a relatively small payment required by a one-time charge under the 2017 tax overhaul. Challengers are seeking a ruling limiting income that can be taxed to money “realized” by taxpayers — that is, cash they receive or in some fashion control, as opposed to a mere increase in the value of their holdings. Conservative groups behind the case see it as an opportunity for the court to narrow the definition of income taxable under the 16th Amendment, heading off progressive initiatives such as taxes proposed by Democrats on wealthy people’s unrealized capital gains. (The Wall Street Journal)
Inflation pushes IRS to change standard deduction, tax brackets
The Internal Revenue Service announced its annual inflation adjustments to federal income-tax brackets for 2024, an increase that slightly outpaces the current inflation rate. This means some Americans will pay less in taxes. The adjustments, based on formulas set out in the tax code, are meant to keep inflation from hiking taxes. The standard deduction and the thresholds for each tax bracket are up 5.4 percent, the second-largest adjustment in the past three decades after 2022’s 7.1 percent hike. The income thresholds for paying capital-gains tax at various rates and the federal estate tax are also indexed for inflation. For 2024, the 0 percent rate applies to single filers with taxable incomes up to $47,025 and joint-filing couples with incomes up to $94,050. The federal estate-tax exclusion amount, how much an individual can shelter from estate taxes, is $13.61 million for 2024, up from $12.92 million in 2023. (The Wall Street Journal)
IRS sets adjustments to maximum retirement contributions
Most workers will be able to put up to $23,000 into their 401(k)s and similar workplace retirement plans in 2024, up $500 from 2023, the IRS said. The tax agency announced the inflation-adjusted limits for retirement plans, following formulas set out in the law. The limit on contributions to an individual retirement account will also increase by $500, climbing to $7,000 in 2024. People ages 50 and up can make additional so-called catch-up contributions to IRAs and 401(k)-style plans, though those limits remain $1,000 and $7,500, respectively. The contribution limits are the same for Roth and pretax 401(k) and for individual retirement accounts. (The Wall Street Journal).
This report was compiled by the Alternative & Direct Investment Securities Association (ADISA). Visit the ADISA website (http://adisa.org/home) to stay current on all of the organization’s advocacy initiatives.