Controversy arose this week when Americans for Tax Reform (ATR) produced an analysis which stated that gold medal winners would return to the United States to face a tax bill of $8,986 as a result of the value of the medal itself ($236, according to their study) and the $25,000 bonus the United States Olympic Committee pays gold medal winners. In response to the controversy, Florida Senator Marco Rubio has introduced a bill that would exclude from income all prizes and payments to athletes as a result of their competition in the Olympics. The ATR analysis makes two assumptions when reaching its conclusions: 1) the value of the medal is taxable and 2) all Olympic winners make over $388,350, the 2012 threshold into the 35% bracket for single people.
First, the value of Olympic medals is not taxable. Having prepared returns for gold medalists and having had those returns audited, and the taxability of the value of medals won has never arisen. Even if the value of a gold medal is $675, or $621 depending on whom you ask, this is de minimis considering the income and endorsement opportunities most of these athletes have when returning home.
Next, the tax bracket in which a gold medalist will belong depends on his/her day job and/or marketability. While famous Olympians like Michael Phelps and Ryan Lochte earn millions in endorsements, others such as Vincent Hancock (skeet shooting) likely do not. As a Sergeant in the Army, Sgt. Hancock makes around $32,000 for his day job, so the $25,000 bonus from the USOC keeps his family in the 15% tax bracket. Sgt. Hancock is then entitled to an $11,900 standard deduction (or itemized deductions if higher) and $15,200 in personal exemptions for himself, his wife and two daughters. These deductions reduce his taxable income to $27,100 before considering his skeet shooting expenses.
As an athlete in the business of skeet shooting, Sgt. Hancock can write off his skeet expenses against skeet shooting income. These include but are not limited to guns, bullets, skeet, protective eyewear, coaching, mileage to and from his training facility (if he trains at his Army base, mileage would be deductible only if he was traveling to and from the facility for skeet shooting and not for Army business), travel and meals at skeet shooting seminars, training and competitions away from home.
ATR is correct in that the USOC medal bonuses are not subject to self-employment taxes. These payments are awards given unilaterally and not the result of a contract or agreement between the athlete and the USOC.
Senator Rubio’s bill, if passed, would fully exempt “any prize or award won by the taxpayer in athletic competition in the Olympic Games.” Any agent worth his/her salt would ensure that most, if not all, endorsement contracts for an Olympian include hefty bonuses for medals. For Phelps, this would include bonuses from Subway, Hilton, Omega, Speedo, Visa, Proctor and Gamble and Under Armour, and at least three others. Lochte would receive bonuses from Sprint, Gatorage, Gillette, Nissan, Speedo, AT&T, Proctor and Gamble, Mutual of Omaha and Ralph Lauren. The bill, as currently written, would exclude all of these bonuses from taxation. Assuming each of Phelps’ and Lochte’s endorsers match the USOC’s medal bonuses of $25,000, Phelps could receive $300,000 tax-free from the USOC and his eleven endorsers for each gold he wins (two as of this publication) and Lochte could receive $250,000 for each of his two golds. Lochte and Phelps also have two silvers each and Lochte a bronze and each will receive bonuses from the USOC and likely from endorsers for those.
While Olympic athletes will pay taxes on bonuses earned at the Olympic Games—not on the medals themselves—not all of them will pay 35%. If Senator Rubio’s bill becomes law, some Olympians will enjoy over $100,000 of tax breaks while lower-income Olympians such as Sgt. Hancock would receive a smaller but not insignificant break.
First, I don’t find it surprising that Senator Rubio would stand up for cutting taxes on the 1% (or .001%) of athletes. How about allowing the 99% to deduct their gym memberships or softball league fees?
Second, Isn’t there tax exemption of the first $125,000 of income earned overseas? If so only those who wins many multiple medals would pay any tax, unless they did other foreign competitions throughout the year.
The foreign earned income exclusion only applies to money earned overseas when a person is a “bona fide resident” of a foreign country or spends 330 days abroad during a 12-month period (aka the physical presence test). Otherwise, all income, no matter where it is earned, is taxable in the US. If the income is also taxed in the foreign country, the taxpayer can receive a credit on his/her US return to avoid double-taxation.
Can you elaborate as to why athletic prizes are not subject to self employment tax?
I had thought they would be because the income is connected with the taxpayer’s trade or business (of being an athlete).
Surely the performance awards won by (for example) track athletes at the Golden League meets are subject to self employment income.
Thanks.
When an athlete enters a tournament, race or meet and there is an established prize money structure, the winnings are subject to self-employment taxes. The same is true when winning leads to endorsement bonuses. In both cases, the athlete has a business relationship with the payor. However, in cases like the USOC/USA Swimming, no business relationship exists between the athlete and the organizations. Both organizations provide training support so they may put the best athletes on the largest stage but that is the extent of it–no employment or independent contractor relationship exists. The bonuses are determined by the USOC/USA Swimming without any negotiation on the part of the athlete. I have successfully argued that these payments are not subject to self-employment taxes because they are unilateral in nature for the reasons mentioned above.
A subtle distinction. Good to know that you have been successful with it.
Thanks for the reply.