Income Tax on Having Your Income Tax Paid for You

Factual Questions
1

Let’s say I’m in the audience on Oprah and she gives us each about $8,000 worth of goodies. That’s $8,000 worth of income on which we have to pay taxes. So Oprah kicks in another $2,500 to pay the income tax. But that $2,500 is income as well, isn’t it? So Oprah kicks in $600 to pay the tax on that. But that $600 is also taxable as well, no? So Oprah kicks in another $140 so pay that. But that $140 is also taxable income…

My question is: could this theoretically continue until we get into pennies? Or do you not have to pay income tax on the income when the income tax is paid for you?

2

Tax forms usually only consider whole dollar amounts, so it will reach a stopping point.

The way to calculate it is much simpler than the “keep adding the tax” method you’re using, though. If you want someone to end up with $x, with r being the tax rate, you just give them $y = $x/(1 - r).

3

They could just assume you will be paying 28% income tax on that gift, and thus give you $9756.10

8000 * (1 / (1 - 0.28))

4

It’s called “grossing up” (because you raise the gross payment so achieve the net payment you want).

–Cliffy