What Carried Interest Is, and Why You Should Care

President Obama's new proposed budget is out, and it includes a call to eliminate what's known as the carried interest provisions of the tax code. But what is carried interest, and why should ordinary investors care about it?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at carried interest and its impact on taxes. Dan notes that carried interest is a way that many investment managers get paid, by taking a share of profits from the investments they make. With the rise of private-equity firms Blackstone Group (NYSE: BX  ) , Apollo Global Management (NYSE: APO  ) , KKR (NYSE: KKR  ) , and Carlyle Group (NASDAQ: CG  ) , carried interest has gotten a lot of attention because it enables managers to pay lower long-term capital gains rates on what many would see as compensation for their management services. But proponents argue that carried-interest treatment is fair because the managers' investment is at risk. Dan concludes that big fights about the provision have occurred in the past, and they're likely to repeat themselves this time around as well.

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