The Price of Victory
Too bad they had to bring back some expensive baggage: the tax consequences of winning.
“Medals are prizes, and all prizes are generally taxable,” says Gil Charney, CPA, CFP, and director – Tax Law and Policy Analysis, The Tax Institute at H&R Block.
Besides receiving gold, silver, or bronze medals, U.S. Olympic winners collect cash prizes, which are taxed as ordinary income to the winner:
- Gold – $25,000
- Silver – $15,000
- Bronze – $10,000
In addition, the medals themselves have value (which fluctuates), and that value is also taxed:
- Gold – approximately $550 to $600
- Silver – approximately $300 to $350
- Bronze – approximately $3 to $4
“Winning a gold medal creates income of $25,600,” says Charney. “That’s the cash prize for a gold medal plus the value of the medal itself.”
Don’t put away the calculator just yet: There’s more math involved.
Brackets and the bank
“The actual tax on that prize depends on the tax bracket of the winner,” says Charney.
Take, for example, U.S. swimmer Michael Phelps. Having earned 28 medals over his career, he’s the winningest Olympian ever. This summer, Phelps won five golds and one silver. (That’s (5 x $25,000) + (1 x $15,000) = $140,000.) Taxed at the highest rate (39.6 percent) – the tax bracket Phelps is in – his tax bill on the $140,000 would be $55,440.
However, not all winners are in the category of Michael Phelps, who would have a federal tax of about $10,138 on a single gold medal ($25,600 x 39.6 percent). In contrast, an athlete in the 25 percent tax bracket would pay $6,400 ($25,600 x 25 percent) on the same prize.
And that’s not the end of the tax story.
“Those previously mentioned rates and amounts are only for federal tax,” says Charney. “State and local taxes will vary.”
Odds and ends
Of course, the afterglow of Olympic victory may shine brighter for winners who land lucrative product endorsements. (Gymnast Gabby Douglas sells cornflakes, snowboarder Shaun White touted American Express, figure skater Michelle Kwan pitched Kraft foods, and so on.)
“Successful athletes may win product endorsements, all of which are taxable as ordinary income,” says Charney.
And what about all the hard work, like travel and training, that Olympians need to get to the top?
“Taxpayers can only deduct expenses for training and travel if they are ordinary and necessary expenses required for a trade or business,” says Charney. “Olympic athletes, whose lives typically consist of constant training and competitions, would probably qualify for such treatment.”
But there’s no magic formula for determining that.
“If you are training for and participating in athletic events often enough so that it could reasonably be considered a job, and if you don’t have another full-time job, you could rise to the level of being a professional athlete,” says Charney.
“It would also help to win competitions (and prize money), as well as endorsements, to support the claim that the activity is truly a profession. However, winning is not a requirement, any more than being profitable is a requirement to operate a business.”
However, that’s the tax theory.
“In practice, some Olympic athletes may be sponsored by organizations that pay for their travel and training, so they may not have any out-of-pocket expenses they can deduct,” says Charney.
In addition, athletes may pay for expenses with stipends, scholarships, gifts, earnings from part-time jobs, and even proceeds from crowdfunding campaigns.
“So the tax treatment of athletes’ income and expenses will vary,” says Charney.
For those with the talent and guts to earn glory, a shot at winning may be worth any price.
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