Senator Charles E. Schumer (D–NY) is urging Congress to block the IRS from taxing Olympic medals. In the scheme of things, the worry over Olympic medals triggering taxes seems a little silly. After all, if you are about to rake in millions in product endorsements, is it likely you care if the $25,000 cash prize that comes with a gold medal is something like $16,000 after taxes?
Still, just as occurred four years ago with the last batch of Olympic medal winners, more than a few people are talking about the modest cash prizes that come with the medals. Athletes get $25,000 for gold, $15,000 for silver and $10,000 for bronze. And since cash is cash, they trigger federal income taxes. But some observers find that a shock, even an injustice! Senator Schumer for one says it isn’t right. Note that these stipends come from the U.S. Olympic Committee, not the U.S. government. Of course, they are small compared to what medals bring in endorsements and other income.
And in that sense, this is hardly a big issue, however it comes out. But make no mistake, the IRS does like to collect. Since 1986, prizes and awards are fully taxable. The IRS website warns that cash prizes and awards are taxed whether you win a drawing, quiz show or beauty contest. It’s the same rule for any cash prize, be it the lottery, a Nobel Prize and Olympic medals too. Plus, you must report the fair market value of merchandise or products. It’s all other income on Form 1040, Line 21.
Most people just pay the tax, but you could avoid taxes by declining an award. One famous example was George C. Scott, who declined a Best Actor Academy Award for Patton. You can even decline a Nobel Prize, and six Nobel laureates have done it. Nobel laureates receive a diploma, a gold medal, and cash in Swedish kronor. The amount has been as high as $1.5 million but is now considerably less.
President Obama cleverly managed to accept his Nobel Peace Prize, but to donate the cash that came with it to charity. And because he arranged it in advance, a kind of regifting of the $1.4 million cash award, it was tax efficient. Had he just won the Nobel and taken the $1.4 million, he could turn around and give it to charity. Unfortunately, though, the tax consequences of regifting can be problematic.
That is, he would not have been able to write off the entire $1.4 million. Why? Because you can’t deduct charitable contributions exceeding 50% of your contribution base–generally your adjusted gross income. That’s why his arrangement in advance for the cash bypassed his income entirely. That was good tax planning. Of course, winning his its own perks, financial and otherwise.
Olympic medal winners stand to earn big thereafter, and that’s true with Nobel Prizes too. Some estimate that a Nobel injects $24 million to an institution’s coffers and even adds two years to a laureate’s life. A study by Research Policy suggests having a Nobel Prize winner is perfect for an initial public offering. Of course, Olympic medals must help too. So I’m betting the Olympians are not that worried about paying taxes on the cash that comes with medals. But this is an election year, so stay tuned.
For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.
via The Tax Lawyer http://ift.tt/2awHGrz