2017 Essential Tax and Wealth Planning Guide
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Tax implications of fund investing
Introduction
2017 Essential Tax and Wealth Planning Guide | Tax implications of fund investing
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Introduction
What is an investment fund?
Types of investment
funds and income tax
characteristics
• Marketable securities
Hedge funds
• Private equity/venture capital
Publicly traded partnerships
Real estate funds
.
Fund of funds
Investment fund attributes
• Trader versus investor
.
.
entities
Passive versus
non-passive income
Separately stated activity
(including PTPs)
Qualified small business
stock (QSBS)
Unrelated business
taxable income
• State tax reporting
Conclusion
Resources
As a taxpayer and an investor, you should
be informed about significant tax and
nontax attributes of fund investments
and manage your portfolio in a manner
consistent with your understanding of those
attributes. Taking time to understand the
tax consequences of investing in a specific
fund will help you produce a more tax
efficient result overall. Thoughtful planning
requires an understanding of a fund
advisor's investment strategy and how that
may impact your personal tax situation,
whether the investment fails or succeeds.
This includes analyzing the tax treatment
upon contribution of capital, evaluating
the impact while you hold, and assessing
the consequences upon sale or other
disposition of the fund investment.
For example, before acquiring new fund
investments, it is important for you to
understand the character of the income
that may be generated by the fund, as well
as when you may recognize such income.
Will the income or gains be subject to the
highest ordinary income tax rates or will
the income allocated to you be subject to
preferential tax rates? Furthermore, you
should discuss with your advisor whether
you will receive a tax benefit from the
expenses and losses that may be allocated
to you. The deductibility of some fund level
expenses may be limited by the itemized
deduction phase-out provisions or added
back under the alternative minimum tax
(AMT) regime. Other expenses from a fund
may directly offset income from fund or
non-fund activities. Furthermore, losses
may be disallowed in the current year if
you are subject to the passive activity loss
limitation rules.
Failing to understand the character of
income and expenses that a fund will pass
through to you can lead to unwelcome
surprises when you receive the final tax
information each year. In addition, fund
investments may cause significant state
implications and create foreign reporting
requirements. Having a clear understanding
of a fund's strategy and the tax implications
of investing in that fund allows you to make
a more informed investment decision. To
do so, let's discuss the types of funds that
exist, the character traits of each fund, and
the tax consequences of investing in each
type of fund.
As a taxpayer and an investor, you should be informed about significant tax and
nontax attributes of fund investments and manage your portfolio in a manner
consistent with your understanding of those attributes.
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