Will Obama have to pay tax on his Nobel earnings even if he gives it to charity?

[scm1001]

I hear that he is going to donate his prize money away. Presumeably he will have to pay tax on it first as an earning or could he find a way to give it pretax though he could claim some back as a charitable donation?

sorry about the title gliche -Mods could you change capital 0 " ) " to capital o - thanks

[Rico]

@scm1001

sorry about the title gliche -Mods could you change capital 0 " ) " to capital o - thanks

<mod>

Gotcha covered.

</mod>

[dracoi]

I believe there is a particular tax ruling on Nobel prizes - if you donate it all, you can make the donation pretax and exclude it entirely from your return.

Otherwise, you run into two problems:

1. by adding it to your income, you wind up with a high AGI. This can disqualify you for many credits and deductions whether it gets subtracted out later or not.
2. donations are only deductible up to 50% of your income. Thus, you’d need at least $1 million in addition income just to make the whole $1 million prize deductible. (If it isn’t deductible, the remainder will carry over and be a deduction in future years).

Either way, you won’t “pay tax on it first” - the tax is calculated after the charitable contribution is figured in and is due along with the rest of the tax from your earnings.

[Kimmy_Gibbler]

No. Pursuant to § 74(b) of the Internal Revenue Code:

(b) Exception for certain prizes and awards transferred to charities

Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—

(1) the recipient was selected without any action on his part to enter the contest or proceeding;

(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and

(3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170 (c) pursuant to a designation made by the recipient.

Subsections (1) and (2) of I.R.C. § 170(c) name governmental units and charitable organizations, respectively.

Because President Obama did not enter the Nobel Peace Prize “contest” (evidently he was as surprised as anyone else) and because he is not required to render any substantial service as a condition of receiving it, the monetary income will not be included in his gross income if he turns it over to the U.S. Government, any state or local government, or a qualifying charitable organization.

[scm1001]

thanks for the info and quick replies

[Hari_Seldon]

I guess the tax law has changed since I left the US. Back in the day, the Nobel prize was not income since you didn’t “enter” it. No scientific or literary prize was taxable income. What a small-minded attitude to such accomplishments.

[dracoi]

@Hari_Seldon

I guess the tax law has changed since I left the US. Back in the day, the Nobel prize was not income since you didn’t “enter” it. No scientific or literary prize was taxable income. What a small-minded attitude to such accomplishments.

TaxAlmanac lists both the IRC Section and its history. It looks like 74(b) has been in effect since 1954.

Making something like the Nobel prize entirely tax free would open up a mile-wide loophole. And even if you pay 35% tax on your Nobel price, you’re still up $650,000.