After it was revealed last week that U.S. President Barack Obama had won the Nobel Peace prize, Obama was quick to announce that he would be donating the $1.4 million cash prize to charities. This has led many experts to wonder, what tax implications will his prize have on Obama’s next income tax return?
Pat Regnier, of CNN Money, explains that Obama should not have to worry about any tax problems as long as the money goes directly to a charity. Additionally, he might even be ok if he does not have a charity selected when he receives the award since you can deduct charitable contributions up to 50% of AGI, and many suspect that the income he earns from his book this year will not outweigh the prize money.
However, Leonard E. Burman of the Tax Prof Blog brings up another interesting point. Check out her analysis of Obama’s taxes below.
Ellen Aprill's analysis of President Obama's Nobel Prize is fascinating, but left out an important factor in favor of using § 74(b) to avoid the recognition of income. If the president claims the prize as income and then makes a charitable contribution, he'll pay more tax because of the § 68 limitation on itemized deductions. The $1.4 million increase in income will reduce President Obama's itemized deductions by $42,000 (3% of $1.4 million), raising his taxes by $14,700. The problem arises because income is effectively taxed at a higher rate than deductions for people subject to the deduction phase-out.
Other phase-outs cause the same problem. AMT taxpayers in the § 55 phase-out range for the AMT exemption, for example, can face a big tax hit if they include an honorarium or award in income and then make an equal gift to charity. Every dollar transferred reduces the AMT exemption by 25 cents, costing 6.5 or 7 cents in tax depending on whether the taxpayer is in 26% or 28% AMT bracket. (This example has particular salience for me.)