Blog
Back to Blog
$9,000 Tax on Gold Medal is Only Half-Truth
August 3, 2012
Ok. I admit it. I am not patient enough to wait for Olympic results in primetime. I had to peek. For some reason, I went to Yahoo Sports to check the medal count instead of ESPN. One of the lead articles immediately caught my attention. The headline – Winning a gold medal brings a $9,000 tax bill. My initial reaction was “wow, that’s a lot.” My second reaction was “hold on a second, that can’t be right.” The Yahoo Sports article, which you can read here, states that American athletes that win medals at the Olympics face a hefty tax bill – $8,986 for gold, $5,385 for silver, and $3,500 for bronze. The blog author, Chris Chase, did not run these numbers. Instead, he credits the politically motivated Weekly Standard with running the numbers. This, my friends, is what you call a fact-check fail. Knowing these numbers were off, I followed the link to The Weekly Standard article, which you can read here. By the end of the first sentence, one can tell that Mr. Chase over at Yahoo clearly did not even read the article from The Weekly Standard as the Standard gives credit for running the numbers to the “good folks at Americans for Tax Reform…” You can read that article here. And it is here we see the problem. Author Hugh Johnson passes off a variable as fact when he states “American medalists face a top income tax rate of 35 percent.” The article later uses this statement as its basis for establishing the reported tax bills. I can tell this article has made the rounds because I have heard about it on the radio and online at reputable news outlets and honestly the fact no one has fact-checked this article saddens me. So, what’s the problem? It’s the math. It is factually true that some American medalists could face a top income tax rate of 35%. However, the full 35% tax rate does not kick in until a single taxpayer has more than $379,000 in total taxable income for a year. That is a lot of medals. In fact, an athlete would have to win at least 15 gold and a bronze to reach that in prize money. I am pretty sure that has not yet happened in one Olympics. I will concede that some athletes will hit that amount through endorsements, but the Michael Phelps’s of the world are rare, not the norm. The first problem is that the original author Hugh Johnson passes the exceptional athlete in the 35% tax bracket as the rule. The second problem is that so many outlets are willing to pass on this garbage as truth when it is clearly slanted. Before I jump into the numbers, I’ll say that in no way am I trying to defend the IRS. I am a tax attorney and my job is to help clients who have problems with the IRS. By no means should they be let off the hook. On the same note, the numbers purported as truth in Mr. Johnson’s article are downright devious and clearly not responsible. He obviously had a political bent, which he certainly has the right to do. I’m not here to wade into the political merits of his stance, but if he is going to jump into the tax code pool to make a point, he has clearly shown he still needs his floaties. Now, let’s break down the numbers. First, I will demonstrate how Mr. Johnson arrived at his numbers assuming the prize is $25,000 gold, $15,000 for silver, and $10,000 for bronze. Mr. Johnson took the prize amount and multiplied it by the top tax rate of 35%. The result is a tax of $8,750 for gold, $5,250 for silver, and $3,500 for bronze. He then added in a de minimus amount for the tax on the actual medal itself to arrive at his total, which I will accept as true, but not important enough to include for the purposes of this posting. Even if the athlete is subject to a 35% tax rate, the amounts reported as tax are still probably not correct. If the athlete is making more than $379,000 in taxable income per year, he/she is also more likely than not paying the Additional Minimum Tax (AMT) as well, which kicks up the tax bill even further. I would make the argument to apportion some of the AMT to the medal prize money, making the real tax rate on the medal even higher. My point – Mr. Johnson’s amounts are not only slanted, they are wrong. If that was the ceiling, let us take a look at the floor. Let us now assume that our athlete is a single taxpayer, has no other source of income and is not claimed as a dependent on his/her tax return. Please note I am using the 2011 tax rate table as the 2012 numbers are not yet available. Along with the previous paragraph’s assumptions, we have to allow each medal winner at least his/her standard deduction and one exemption (again, this assumes they cannot be claimed as a dependent). The combined standard deduction and one exemption in 2011 was $9,500, which means the taxable income will drop from $25,000 to $15,500, $15,000 to $5,500, and $10,000 to $500. The tax bills are now $1,904 for gold, $558 for silver, and $51 for bronze. The effective tax rate for gold is less than 7% and it goes down from there. Ultimately, the “tax bill” is decided by the taxpayer’s tax rate, which depends upon the taxpayer’s overall income and allowed deductions. My disgust with the $9,000 tax bill article comes from the glossing over of these variables. While it makes for a good headline, it clearly lacks journalistic integrity. Finally, in case you are wondering, the prize money is treated as Line 21, “Other Income” on a tax return. It is not subject to self-employment tax. Until next time, Alex