Can H&R Block pay a winner's taxes?

Factual Questions
1

I see where this week is the “Tax Free” edition of “Who Wants to be a Millionaire?” in which H&R Block will foot the bill for taxes owed on any earned winnings. My Question:If they pay the taxes on a milion $, doesn’t THAT money qualify as income to the winner also, thereby subjecting it to taxes as well. Now suppose H&R throws in some extra to cover THAT, wouldn’t that also be taxed,etc.,etc. Kind of like stepping half the distance to a door with every step. In theory you’d never actually cross the threshhold.

I await your final answer…

2

Well this is how I thought of it:

Let’s say tax rate is 30% (for example)

$32,000 minus taxes = $22,400
$45,714.29 minus taxes = $32,000

Therefore H&R block pays $13,714.29

$1,000,000 minus taxes = $700,000
$1,428,571.43 minus taxes = $1,000,000

Therefore H&R block pays $428,571.43

3

I assume that H&R simply figures out how much more you would have had to have won to take home the declared prize amount. They kick in the difference between that amount and what WWTBAM is handing over. I don’t think the IRS gives a Philbin who you won your money from, it is going to get taxed at the same rate.

4

Here’s the press release: http://www.hrblock.com/press_relations/content/pr_2001_08.html?source=press

I have to say I thought of it the other way from you guys above. I thought the winner receives the prize money as is, with the taxes shifted to H&R Block. These taxes paid wouldn’t be considered income to the winner.

They say “If a contestant does answer all 15 questions correctly, H&R Block will save that person nearly $400,000 in federal taxes.” This seems equivalent to the 40% tax rate I’ve heard is applied to prize money.

5

When I started with a new company across the country I was given $5000 to put towards moving expenses. However, in the company’s accounting books I was actually paid $5XXX, with the XXX part being withheld for tax purposes. On my final paycheck for the year my yearly salary was adjusted by the total amount. In that way, I didn’t have $5000 of income that I did hadn’t already paid taxes on and I didn’t have an unexpected hit on my tax bill.

The H&R Block & Millionaire deal is much the same.

6

Except when rounding the answers to the nearest cent, which you would do with your taxes. Your way would work eventually (13 iterations to be exact).

Again, tax rate 30%:


Before Tax     After Tax    Payee
---------------------------------
32,000          22,400      Millionaire
 9,600           6,720      H&R
               -------
                29,120
 2,880           2,016      H&R
               -------
                31,136
   864             604.80   H&R
               ----------
                31,740.80
   259.20          181.44   H&R
               ----------
                31,922.24
    77.76           54.43   H&R (Rounded off there)
               ----------
                31,976.67
    23.33           16.33   H&R (Rounded off again)
               ----------
                31,993.00
     7.00            4.90   H&R
               ----------
                31,997.90
     2.10            1.47   H&R
               ----------
                31,999.37
      .63             .44   H&R (Rounded off again)
               ----------
                31,999.81
      .19             .13   H&R (Rounded off again)
               ----------
                31,999.94
      .06             .04   H&R (Rounded off again)
               ----------
                31,999.98
      .02             .01   H&R (Rounded off again)
               ----------
                31,999.99
      .01             .01   H&R (No tax on a penny right?)
               ----------
                32,000.00

Now if we add up all the H&R lines: $13,714.30 only a penny off from my original amount. Could be that way due to repeated rounding of results.

Yeah, I was a little bored here… :smiley:

7

One guy who won $1M from them (no, not lately) said after stay & fed tax, he got $550,000 left. So there is a real example.

8

Dave they invented algebra to solve this problem.

M= (W+H)*(1-T)

M is money after taxes
W is winnings like 1 million buck from the game show
H is what H and R will pay
T is % tax rate divied by 100

This formula show what you are saying. The winner gets taxed on the money H&R Block contributes to your taxes.

Lets say you live in CA 39% is the highest fed marginal tax rate
9.3% is highest state marginal tax rate

So T= .483

W= 1,000,000
M= 1,000,000
solving for H

H=(M-W*(1-T))/(1-T)
H= $934,236

H&R Block pays almost as much as the game shows insurance company.

So don’t say the rich don’t pay taxes. They pay a lot of taxes. There is just some left over after the tax man commeth.

As an aside about this game show the insurance company has complained that the questions are too easy and they have to pay to much.

9

T is not really 0.483. The maximum marginal federal rate only applies to the winnings over $288,350.

For simplicity, I’ll assume the winner is single. The taxes paid will be the sum of all these:

$26,250 * 15% = $3,938
($63,550 - $26,251) * 28% = $10,444
($132,600 - $63,551) * 31% = $21,405
($288,350 - $132,601) * 36% = $56,069
(W + H - %288,351) * 39.6% = 0.396 * (W+H) - $114,187

TOTAL TAXES = 0.396 * (W + H) - $22,331

Hmmm, that was quite a bit of work for only a $22k difference. I assumed it was more. Oh well.

10

it might help you folks with too much time to know that the Internal Revenue Code specifically allows rounding off the cents.

11

Just for another data point, on the show last night Regis explained that the show pays the contestant their winnings and then H&R Block kicks in an additional amount designed to cover the taxes on the total and leave the contestant with their total (show) winnings. He also made a comment to the effect that the contestant was actually given all the money and could spend it on whatever they wanted to, not neccessaraly their taxes.

12

tanstaafl, he also said this was the last week of that deal.