The Nobel Peace Prize Shouldn’t Cost President Obama $623,000

Pretty much everybody knows that the federal tax code is irreparably broken. That being said, I’m not sure President Obama was aware of this gem when he announced his plan to donate his $1.4 million prize to charity.

This from Bill Leonard, my elected representative on the California Board of Equalization, and a consistent friend of taxpayers…

It will cost President Obama over $623,000 to accept the Nobel Peace Prize, even if he gives every penny to legitimate, tax-exempt charities!

President Obama announced that he will donate the prize money of $1.4 million to charity. Unfortunately, the President is about to learn that our federal tax system really punishes this type of generosity.

The $1.4 million prize is considered taxable income if the President or anyone else accepts it, even for purposes of re-gifting. It is still income if he just tells the Nobel Committee to send the prize money directly to charities that he supports. Believe it or not, it is still considered income to the President if he tells the Nobel Committee to send the entire prize to the federal government.

The first problem for the President is that there are strict limits to charitable contribution deductions. Generally, charitable deductions are limited to 30% of the taxpayer’s adjusted gross income. If the President and the First Lady earned nothing besides the Peace Prize and his salary, then around a third of the Peace Prize would be deductible and the rest would be fully taxable, even if donated to charity.

The more costly problem for the President is that itemized deductions are phased out for taxpayers with “high” incomes, such as people who win large prizes worth $1.4 million. In fact, the alternative minimum tax can apply to couples earning as little as $69,950 which is a tax disgrace. Since the President’s salary alone is $400,000, it is safe to assume that no portion of the prize money will be deductible under this Alternative Minimum Tax even if it is all donated to charity.

Congratulations, Mr. President and thanks for being a great example of why this awful system of taxation should be repealed.

Is this a “fair” feature of our tax code? In your mind, what is the best way to fix the tax system? Would you stick with a streamlined income tax, explore a VAT or switch to consumption taxes?

http://mod-blog.blogspot.com/ crchair

Flat Tax all the way.
http://www.aaronklein.com aaronklein

(for the sake of discussion)…even though Reagan opposed it because it was too regressive?
http://www.nationonthehill.com Tyler

Fair tax….Fair tax….Fair tax….Fair tax….Fair tax…. I can't say it enough….Unless some better idea comes along. Is it not modded with rebates or exemptions to remove regressive effects? I could be wrong but I thought that was the whole idea.
http://www.aaronklein.com aaronklein

I don't think most folks understand the fair tax quite as well as they might the flat tax. For the sake of discussion, why don't you expound on that and/or post a link with more info?
http://www.nationonthehill.com Tyler

I haven't dove deep, but there talking points sound good:

Enables workers to keep their entire paychecks
Enables retirees to keep their entire pensions
Refunds in advance the tax on purchases of basic necessities
Allows American products to compete fairly
Brings transparency and accountability to tax policy
Ensures Social Security and Medicare funding
Closes all loopholes and brings fairness to taxation
Abolishes the IRS

I like the idea that it only taxes new store bought items

http://www.fairtax.org/
NPM

I agree that the tax system is messed up. However, I don't think the analysis regarding taxable income is correct.

Here is the IRS says regarding prize money from awards such as this:

Pulitzer, Nobel, and similar prizes. If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the following requirements.

1.

You were selected without any action on your part to enter the contest or proceeding.
2.

You are not required to perform substantial future services as a condition for receiving the prize or award.
3.

The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer.
1.

You cannot use the prize or award before it is transferred.
2.

You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:
1.

The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code,
2.

A description of the prize or award,
3.

The name and address of the organization to receive the prize or award,
4.

Your name, address, and taxpayer identification number, and
5.

Your signature and the date signed.
3.

In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc., in the case of money) and then prepare the statement as described in (b).
4.

After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.

See: http://www.irs.gov/publications/p525/ar02.html#….
http://www.aaronklein.com aaronklein

Well, I must say, that's good to know since I'm also now apparently qualified to win the Nobel Peace Prize for my potential future accomplishments. I was worried for a little bit!

But now we're all going to wonder if you are a cyborg, or if you actually read the entire tax code. I never really considered trying to double-check Bill's column on that basis.
http://mod-blog.blogspot.com/ crchair

Flat Tax all the way.
http://www.aaronklein.com/ Aaron Klein

(for the sake of discussion)…even though Reagan opposed it because it was too regressive?
NPM

I don't do much tax work today, but I used to do a fair amount of tax-exempt entity work back in the day. Something about the post just struck me as not quite correct. I did take federal tax income taxation in law school also, but seriously doubt that I've read the entire tax code.
quizwedge

I like that my savings isn't taxed and that the refund comes in advance, but I think their argument that the IRS is abolished is a litte disingenuous. After all, someone needs to keep track of the refunds in advance and the sales taxes paid by businesses. That being said, I think that it should be much easier to keep track of and gives the potential for a smaller governmental unit than the IRS.

My big concern is that in an economy like this, people aren't looking to spend. Adding a sales tax could hurt the economy more. I understand that people would get more in their paychecks, but I just don't think that people will run out and spend that money like they would have a few years ago.

The other issue is unemployment. Slimming down the IRS and getting rid of the need for many CPA's will just add more to the unemployment rolls. Not that I'm advocating for wasteful spending, it's just something that needs to be thought about.

But if it works, I like the idea of the fair tax better than an income tax. Not sure on fair tax vs. VAT. They seem to be roughly equivalent to me.
http://www.aaronklein.com aaronklein

Okay, we'll send the Federal Cyborg Enforcement officers back to their stations
Tyler

Fair tax….Fair tax….Fair tax….Fair tax….Fair tax…. I can’t say it enough….Unless some better idea comes along. Is it not modded with rebates or exemptions to remove regressive effects? I could be wrong but I thought that was the whole idea.
http://www.aaronklein.com/ Aaron Klein

I don’t think most folks understand the fair tax quite as well as they might the flat tax. For the sake of discussion, why don’t you expound on that and/or post a link with more info?
Tyler

I haven’t dove deep, but their talking points sound good:

Enables workers to keep their entire paychecks
Enables retirees to keep their entire pensions
Refunds in advance the tax on purchases of basic necessities
Allows American products to compete fairly
Brings transparency and accountability to tax policy
Ensures Social Security and Medicare funding
Closes all loopholes and brings fairness to taxation
Abolishes the IRS

I like the idea that it only taxes new store bought items

http://www.fairtax.org/
NPM

I agree that the tax system is messed up. However, I don’t think the analysis regarding taxable income is correct. nnHere is the IRS says regarding prize money from awards such as this:nnPulitzer, Nobel, and similar prizes. If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the following requirements.nn 1.nn You were selected without any action on your part to enter the contest or proceeding.n 2.nn You are not required to perform substantial future services as a condition for receiving the prize or award.n 3.nn The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer.n 1.nn You cannot use the prize or award before it is transferred.n 2.nn You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:n 1.nn The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code,n 2.nn A description of the prize or award,n 3.nn The name and address of the organization to receive the prize or award,n 4.nn Your name, address, and taxpayer identification number, andn 5.nn Your signature and the date signed.n 3.nn In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc., in the case of money) and then prepare the statement as described in (b).n 4.nn After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.nnSee: http://www.irs.gov/publications/p525/ar02.html#en_US_publink100098548. n
http://www.aaronklein.com/ Aaron Klein

Well, I must say, that’s good to know since I’m also now apparently qualified to win the Nobel Peace Prize for my potential future accomplishments. I was worried for a little bit! nnBut now we’re all going to wonder if you are a cyborg, or if you actually read the entire tax code. I never really considered trying to double-check Bill’s column on that basis.
NPM

I don’t do much tax work today, but I used to do a fair amount of tax-exempt entity work back in the day. Something about the post just struck me as not quite correct. I did take federal tax income taxation in law school also, but seriously doubt that I’ve read the entire tax code.
http://www.aaronklein.com/ Aaron Klein

Okay, we’ll send the Federal Cyborg Enforcement officers back to their stations
Anonymous

I like that my savings isn’t taxed and that the refund comes in advance, but I think their argument that the IRS is abolished is a litte disingenuous. After all, someone needs to keep track of the refunds in advance and the sales taxes paid by businesses. That being said, I think that it should be much easier to keep track of and gives the potential for a smaller governmental unit than the IRS.nnMy big concern is that in an economy like this, people aren’t looking to spend. Adding a sales tax could hurt the economy more. I understand that people would get more in their paychecks, but I just don’t think that people will run out and spend that money like they would have a few years ago.nnThe other issue is unemployment. Slimming down the IRS and getting rid of the need for many CPA’s will just add more to the unemployment rolls. Not that I’m advocating for wasteful spending, it’s just something that needs to be thought about.nnBut if it works, I like the idea of the fair tax better than an income tax. Not sure on fair tax vs. VAT. They seem to be roughly equivalent to me.

The Nobel Peace Prize Shouldn’t Cost President Obama $623,000

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