Many U.S. athletes had great success at the 2012 Summer Olympics in London. We all know that winning an Olympic medal means, well, one is physically presented with an Olympic medal (gold, silver or bronze) on the podium.

The medals themselves have an economic value, albeit fairly low if determined based upon the actual amount of precious metals. Less well known is that the U.S. Olympic Organizing Committee (“USOC”) apparently awards money to winners, reportedly $25,000 for each gold, $15,000 for each silver and $10,000 for each bronze medal.

Under the Federal Income Tax laws, prizes and awards received by U.S. Taxpayers are generally considered to be ordinary income. This is true whether you win the money playing the lottery, Wheel of Fortune or swimming at the Olympics.

Politics, the Olympics and the Federal Income Tax laws are an unlikely combination. However, some U.S. politicians made news in August of 2012 by claiming that a gold medal would cost an athlete $9,000 of Federal Income Tax and that it was unfair to tax our proud American athletes. It became one of the few proposed tax law changes openly supported by both Republicans and Democrats. Did I mention that it is an election year?

Michael Phelps won 4 gold and 2 silver medals at the 2012 Olympics in London. This would net him $130,000 of USOC awards. The final 2012 tax tables have not yet been released. However, based upon the anticipated rate structure, if this $130,000 was his only income and he had no deductions (other than the “Standard” deduction and exemption that everyone gets) he would pay roughly $27,000 of Federal Income Tax. $27,000 is just under 21% of $130,000 (i.e. an effective tax rate of 21%). Of course, if Phelps happened to also earn another $10 Million in 2012 from endorsements, his relative tax rate on all ordinary income would be closer to 35%. At the same time, if instead of endorsements, Phelps had $10 million of long-term capital gains, his relative tax rate on all income would be closer to 15%.

Professional athletes are taxed on the income that they earn from playing their sport. Should athletes that compete in the Olympics should be treated differently? If so, what about the players on U.S. Olympic basketball team? The U.S. Olympic basketball team is comprised entirely of professional NBA players who are subject to income tax on their salary for playing the same game; with and against many of the same players.

Kyrie Irving, was born in Australia and is a dual Australian-American citizen. He was the number one NBA draft pick and 2011-2012 NBA Rookie of the Year. When he was passed over for the U.S. Olympic basketball team there was some talk about him playing for Australia. Although he did not end up playing for Australia, if he had, and won a prize, should his prize be exempt from U.S. tax?

By the way, the U.K. has a worldwide tax system that is similar, but not the same as the U.S. Based upon the way that the U.K. taxes professional athletes there was some concern that some high profile athletes from around the world might not elect to compete in the London Olympics. Usain Bolt had already refused to compete in the Aviva London Grand Prix in July of 2012 and threatened to boycott the Olympics in London as well. The U.K. taxing authorities agreed to a limited “Olympics” exception, thus avoiding a possible tax boycott.




Copyright ©, Keith B. Baker – 2012

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