Do Nobel Peace Prize winners have to pay income taxes on the prize money? Obama surely isn’t because he is giving the money away, but that brings up a different question. Is he getting a huge tax writeoff because he is giving the money away? I want to see his Income Tax return next year.
you fail basic accountancy. Getting given a sum of money and then donating 100 percent of it to charity is tax neutral, it’s exactly equivalent to not getting the money at all.
What’s the difference between that and donating money you earned for your labor? Especially that in this case the prize money is (in theory) earned?
Tax deductible doesn’t mean that you deduct the full amount from your tax bill. It means that the amount of your taxable income is reduced.
Look, to keep it simple, suppose you have an income of $100,000 and a tax rate of 10%. That means that you pay $10,000 and have $90,000 disposable income.
But suppose that you give $10,000 to charity. That is tax deductible and means that you have an taxable income of $90,000. You will still have to pay 10% tax on that, i.e. $9,000. So after tax and donations you are left with $81,000.
As for winnings, suppose that you earn $100,000, and win $100,000, then donate your winnings. Your taxable income is therefore $100,000, and you are taxed on that. Your tax bill will be exactly the same as if you hadn’t had any winnings.
Do a search for a recent thread on this. You’re all wrong. I’ll just give a summary of the points:
There is a special provision for awards like the Nobel. If you do not enter the contest in any way, you can choose to give the entire prize up to charity. The amount never shows up as income, and is not a deduction - it’s just like you never got it. Note that is a narrow loophole - it does not work for other prizes like the lottery or bonuses at work.
If the money is included in income and then given way to charity it is NOT tax neutral and NOT just like you never received it. You still show up with a high income, which can disqualify you for many tax credits. In addition, you can only get credit for donations up to 50% of your income.
For example: if you make $100k a year now and you get $1 million lottery winnings, your adjusted gross income is $1.1 million. Even if you donated all $1 million to charity, your maximum deduction for charitable contributions would be $550,000. $450,000 in excess contributions would carry forward to future years, and you’d still be paying tax on $550,000 in income. (Also worth noting: some types of charitable contributions are only deductible up to 30% of your income).