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Sorting out the truth in politics

PolitiFact: Can going for gold in London come with a big tax bill?

Michael Phelps poses with his gold medal for the men’s 200-meter individual medley Thursday at the 2012 Summer Olympics in London.

Associated Press

Michael Phelps poses with his gold medal for the men’s 200-meter individual medley Thursday at the 2012 Summer Olympics in London.

It was probably inevitable, but even the Olympics has been swept into the national political debate.

The antitax crusading Americans for Tax Reform said this week that U.S. Olympic gold medalists like Gabby Douglas, Ryan Lochte and Missy Franklin will owe the Internal Revenue Service up to $9,000 in taxes because of the value of the medal and the prize money that comes with it.

The claim quickly got the attention of U.S. Sen. Marco Rubio, R-Fla., who on Wednesday introduced the Olympic Tax Elimination Act. The legislation would — as you expect — "exempt U.S. Olympic medal winners from paying taxes on their hard-earned medals."

Will a big tax bill be waiting for America's superstars when they get home from London? PolitiFact decided to check it out.

As complicated as federal tax law can be, the fundamental principle behind it is pretty simple whether you're an Olympian or a store clerk: You pay taxes based on what you earn, minus deductions.

For Olympic athletes, that includes prize money offered by the U.S. Olympic Committee: $25,000 for gold, $15,000 for silver and $10,000 for bronze. It could also include the value of the medal — about $675 for gold, about $385 for silver and under $5 for bronze.

To get to a $9,000 tax bill, the antitax group calculated what a gold medalist would owe using the top tax rate — 35 percent. The group found that a gold-medal winner would owe $8,986.

But it's not nearly that simple — largely because of how complicated federal tax law can be.

Accountants who specialize in representing athletes told us that a $9,000 tax payment was unrealistically high. For most athletes, the payment will be less. Possibly quite less. Here's why.

Business expenses

An athlete who wins a medal bonus would be free to deduct any unreimbursed expenses from the bonus, lowering — or maybe even eliminating — her tax hit. In fact, accountants say an athlete would be crazy not to.

"Anything used for the production of income is deductible," said Brad Bell, a partner with BGBC Partners LLP in Indianapolis, who specializes in accounting for athletes.

Greg Shafer, an accountant in Colorado Springs, Colo., added that "if they were my client and had to pay that kind of tax, I would say, 'Well, what are your ordinary and necessary expenses?' That could be travel, uniforms, cell phone use." The U.S. Olympic Committee is based in Colorado Springs, and Shafer said he has provided accounting services to athletes.

So expenses for gymnasts might include tumbling classes, payments to coaches and travel costs to international meets. Cyclists would pay for new bikes and maintenance. An Olympic fencer told that her expenses for equipment and competitions run around $20,000 per year.

All athletes aren't rich

The way the U.S. tax system is constructed, income is taxed at higher rates the higher your income goes. So the full 35 percent rate only kicks in on income earned after you pass a threshold of about $380,000. Below that, income is taxed at lower tax rates.

So even someone earning well into the six figures won't see their medal winnings taxed at 35 percent, even before you take into account exemptions and deductions.

A study by the Track & Field Athletes Association found that about half of track and field athletes who ranked in the top 10 in the United States in their event made less than $15,000 annually from the sport, and only about 20 percent made more than $50,000 annually.

Marathoner Brian Sell, who made the 2008 U.S. Olympic team, told CNNMoney that it took years of struggle, including three years earning less than $25,000, before he made significant money from running. "It's a small percentage of people who make a real living in this sport," he told CNNMoney. "And if you didn't run well, you didn't get paid."

An athlete earning the same $25,000 a year that Sell earned for three straight years would pay about 15 percent on gold medal winnings. That would be $3,851 — before accounting for any allowable expenses.

Our ruling

Americans for Tax Reform is correct that gold medalists' winnings are taxable, and it provides some leeway by saying that U.S. winners could be taxed up to $9,000.

Still, it's not likely that anyone would pay that much per medal in taxes. Any accountant worth their salt should be able to get the tax bill on medal winnings well below $9,000, and maybe even to zero. We rate the statement Mostly False.

The statement

"U.S. Olympic medal winners will owe up to $9,000 to the IRS."

Americans for Tax Reform, July 31, in a blog post

The ruling

PolitiFact ruling: Mostly False

U.S. Olympic gold medalists can receive a $25,000 award for their victory, which is taxable. However, accountants say the final tax bill would most likely be well below $9,000 because of deductions and could be reduced all the way to zero. We rate this claim Mostly False.

PolitiFact: Can going for gold in London come with a big tax bill? 08/02/12 [Last modified: Thursday, August 2, 2012 11:19pm]
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