REAL AMERICA Act

This bill establishes new federal tax deductions for cash tips and qualified overtime compensation, excludes Social Security and Tier I railroad retirement benefits from gross income for federal tax purposes, and modifies the taxation of carried interest.

The bill allows individuals with a modified adjusted gross income (MAGI) of $450,000 or less ($900,000 or less for joint filers) to claim a federal tax deduction for (1) cash tips, and (2) qualified overtime compensation.

The bill excludes all Social Security and Tier I railroad retirement benefits from gross income. (Currently, a portion of such benefits is included in gross income, depending on the beneficiary’s MAGI.)

Under the bill, net capital gain and loss attributable to carried interest is recharacterized as ordinary and, thus, taxed at ordinary income tax rates. (Carried interest is currently taxed at capital gains tax rates, which may be lower than applicable ordinary income tax rates. Carried interest is the share of profits received by the general partner in a private equity firm or hedge fund from the assets managed by that general partner.)

The bill also

• treats as ordinary the money (or fair market value of property) received by a partner in a sale or exchange of carried interest,
• requires distributions of carried interest by a partnership in exchange for interest in other partnership property to be recognized ordinary gain, and
• imposes self-employment taxes on carried interest income.