Taxes and the Olympians – Horrible or Hype?
After watching a piece on the news that discussed the taxation of Olympic medal winner earnings, I was surprised. The way the media is portraying this issue left out many key points. The tax system is very complex, and it’s important to understand a few basics.
United States Olympic athletes are given prize money for their medals by the United States Olympic Committee. A gold medal equals $25,000; silver $15,000, and bronze $10,000.
A Florida Senator has proposed the Olympic Tax Elimination Act, which would exempt the medalists from paying taxes on the value of any prize or award won in Olympic competition.
We all love watching our Olympians, cheer their success, respect their dedication, share their pride and even tear up a bit when the national anthem is played, but here are a few claims made in the media that should be clarified.
1. Each Olympian would pay up to 35% tax on their prize money.
An Olympian would likely be considered a self-employed individual, and be able to reduce their income with their business expenses (see point 2). They pay tax on their income AFTER their business deductions, but they are subject to self-employment tax.
Based on the 2012 tax bracket rates, a single or married Olympic athlete would have to have income after deductions over $388,350 to be taxed at the full 35% rate.
To illustrate, let’s assume an Olympian wins one gold medal ($25,000) and doesn’t have any expenses, deductions or other income. They would pay $1,588 in income tax, plus $3,071 in self-employment tax, for a total of $4,659. The effective tax rate is about 18.6%.
If one athlete wins 6 gold medals ($150,000) and doesn’t have any expenses, deductions or other income, they would pay $30,257 in income tax, plus $15,468 in self-employment tax, for a total of $45,725. The effective tax rate is around 30.5%.
To further complicate matters, the Olympians may have to pay state taxes on their income, depending on their state’s tax law.
2. Some Olympians are keeping track of their out-of-pocket expenses because these can be used as tax deductions to offset income and reduce the tax on their income.
A self-employed individual can deduct business expenses against their business income. This means that any unreimbursed training, supplies, travel, meals, or any other ordinary and necessary business expense can be used to reduce income, and therefore, reduce income tax and self-employment tax.
The substantial cost of training alone could offset most, if not all, of an average Olympian’s taxable income from prizes or awards, assuming they bear this cost themselves.
3. A tax on the Olympic medals is punishing success.
We can always debate the fairness, but our tax system has been designed to tax those who earn money. If you have a job, have a business, or even win the lottery, you have to pay taxes on your income.
If you earn a bonus at work for your success as the top salesperson during a year, you have to pay taxes on that income. The Olympians are not the only ones paying these taxes.
4. U.S. Olympians are being forced to pay tax on income earned outside of the U.S.
Once again, U.S. Olympians are not alone. U.S. individuals and companies doing business in other countries pay U.S. taxes on their income earned in those other countries.
The bottom line is that the tax system is very complex, and U.S. Olympians are being taxed the same as every other U.S. taxpayer.