Why Hedge Funds Should Think About Paying Bonuses Before Tax Overhaul

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Senate Scrambles to Pass GOP Tax Plan

Hedge fund firms should consider paying out bonuses before the end of the year so employees can take advantage of current tax breaks before they potentially change, according to Nicholas Tsafos, partner at accounting firm EisnerAmper.

Tsafos, whose firm advises 1,400 hedge fund firms, is encouraging clients to consider doling out bonuses early, instead of the typical February payout, to ensure that workers benefit from existing deductions for state and local levies. The push by Congress to overhaul the tax code for 2018 could scrap or crimp those regulations that allow some residents to decrease their federal taxable income.

“It is better for bonuses to go out soon because at a minimum they can get state and local tax deductions this year versus next year,” he said.

Bonus pay can make up between 49 percent and 80 percent of an employee’s compensation, according to the 2017 Hedge Fund Compensation Report. Employees at funds that gained at least 25 percent in 2016 are expected to receive a bonus of about $179,000, according to the report which polled staff at more than 200 hedge fund firms globally.

Moving up bonuses to this year presents a snag, though. It means employees would be getting two bonuses in one year, which could push them into an even higher tax bracket, Tsafos said. Adjusting the payout is something a hedge fund firm would need to analyze and discuss with its employees, he said.

More on the potential changes to state-and-local taxes here

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