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Victory tax and what that means for Olympians

2016 Rio Olympic Game Medals

Now that the 2016 Rio Summer Olympic Games are over, our winning Olympians might be surprised when they arrive back home in the United States. That’s because America’s Olympic medalists must pay state and federal taxes on the prize money they get for each win. This “victory tax” can be as high as 39.6% of their winnings and with the U.S. Olympic Committee awarding $25,000 for gold medals, $15,000 for silver, and $10,000 for bronze, it’s almost like the real winner here seems to be the IRS.

You must be thinking by this point, for someone who has carried the flag for his or her country, is this just?

Is this reasonable?

Poor Phelps.

The truth is, most U.S. Olympic medalists won’t actually pay taxes on the winnings.

Here’s why.

Because the athlete is in “the business” of being an athlete. The related business expenses such as travel, equipment, and coaches are all deductible on a federal income tax return. If the athlete reports winnings and other sports related income on a Schedule C, then he or she could claim related deductions on the Schedule C. If it’s a business, those deductions wouldn’t be limited by income.

Okay, so what if the athlete’s participation in his or her sport is a hobby – as opposed to a business – then winnings are reported as “other income” on a federal form 1040. Deductions are then still allowed against winnings but only if the taxpayer (Olympian in this scenario) itemizes those winnings. If the Olympian does itemize his or her winnings, then deductions are treated as “miscellaneous itemized deductions” on Schedule A and are limited to the total of deductions in excess of 2% of AGI, or Adjusted Gross Income. This also means that deductions cannot exceed the amount of winnings or income.

But honestly, what athlete became an Olympian medalist by treating their sport as a hobby?

You can read more about Olympians and taxes here