Quick. Name three millionaires on the American Winter Olympic team at Sochi.
It’s tough. According to Bankrate, the top five American Olympic athletes (NHL athletes excluded) at Sochi are Shaun White, Bode Miller, Ted Ligety, Hannah Teter and Lindsey Jacobellis; the latter two barely crack the $1 million mark.
It’s a far cry from the millions and millions that, according to Forbes, were earned by athletes who appeared at the Summer games. Even if you throw those NHL players back into the mix, our summer Olympic athletes tend to earn more than their winter counterparts (NBA players out earn NHL players by a ratio of more than 2 to 1).
While the Olympics have officially allowed professional athletes to participate in the games since 1986, many Olympic athletes – especially those at the winter games – aren’t professional athletes by trade. Instead, they earn their sports-related income from endorsements, appearance fees, book deals and cash prizes. And even then, securing additional income can be tough: when is the last time you paid to see a professional curler? Or a luger? An ice bocce player?
In addition to the fair market value of the medals, U.S. athletes also take home bonuses for their wins. Those are valued at $25,000 for gold, $15,000 for silver and $10,000 for bronze (other countries may pay more or less). Additionally, some sports may offer extra pay for medals – and some companies may kick in bonus pay, too. It is certainly true that those bonus prizes – as well as the value of those medals – that Olympic athletes take home are reportable and taxable.
But chances are, many of those U.S. athletes who medal in Sochi will not actually pay any tax on their medals and bonuses. Here’s why: if an athlete treats participation in their sport as a business, related business expenses are deductible on a federal income tax return. Those deductions, so long as they meet the “ordinary and necessary” criteria that applies to all taxpayers would be offset by income – including the value of prizes. So all of those training expenses? Travel? Coaches? Equipment? Deductions against income. And if those deductions exceed related income – which is likely the case for many Olympic athletes – the excess can be carried forward or backward.
If an athlete doesn’t treat participation in their sport as a business, but rather as a hobby, deductions are still allowed – but only to the extent there is income to offset those winnings and only if a taxpayer itemizes. If that’s the case, deductions are treated as “miscellaneous itemized deductions” on Schedule A and are limited to the total of deductions in excess of 2% of AGI (adjusted gross income). Any excess deductions can’t be carried forward or backward to other years.
But as I’ve indicated before, I don’t think you get to be Ashley Wagner or Bode Miller by treating sport as a hobby. Have you seen Julia Mancuso fly down the alpine ski trails? Or Sage Kotsenburg rotate through the air during the men’s Slopestyle? You don’t reach that level (or height in the air) by training occasionally.
That also doesn’t mean that you have to have to train every.single.minute of the day. Having a “day job” doesn’t disqualify you from treating another part of your life as a business though, depending on the circumstances, IRS could argue that the lack of time spent on your craft makes it a hobby and not a business. Even so, you don’t have to earn a regular paycheck in your sport a la Patrick Kane who rakes in an estimated $6.5 million per year with the Chicago Blackhawks to call it a business so long as you meet the other criteria. You can still work at the Gap or be a lawyer or a pilot or any other occupation (although Olympic athlete is far cooler to talk about on Career Day at your kid’s school).
The reality is that no matter whether our athletes consider training for the Olympic a business or hobby, some portion – or all – of those training expenses would be deductible. That means that the income related to those medals isn’t creating an economic hardship.
Despite the fact that would result in no federal income taxes directly attributable to winning an Olympic medal for most athletes (I’m not counting appearance fees and endorsements), taxing those winnings still leaves a bad taste in some taxpayers’ mouths. It caused such an uproar in 2012 that Sen. Rubio spearheaded a move to exempt it, saying, “We can all agree that these Olympians who dedicate their lives to athletic excellence should not be punished when they achieve it.”
His proposal for an exemption fell as flat as Italy’s Paul Bonifacio Parkinson (don’t worry, he’s fine). And it was the right choice by Congress.
I think we all agree that Olympians should not be punished for achieving their goals. It’s an amazing accomplishment.
And likewise, I think we all agree that Olympic athletes are pretty cool. I can barely stand up in ice skates without falling, much less do a triple axel.
But should that be enough to merit an exemption from income tax? I’m not sure why that makes sense. We don’t exempt other prize winners in their fields, such as Nobel, Pulitzer and Oscar winners (yes, I’m comparing Clooney to Kofi Annan). Nor do we exempt other taxpayers who sacrifice their time represent our country all over the world – from ambassadors to rescue workers and our military. Why should Olympic athletes be any different?
(Just a little food for thought!)
Source: Tax Girl.