Winning a Nobel Prize comes with a lot of perks, but one thing most people do not realize it also comes with is a tax bill.
Most of us will never win a Nobel Prize, but if we do, it comes with a tax bill. Our old friend the IRS gets a cut of the roughly $1.4 million USD ($10 million Swedish kronor) cash prize. The 2010 winners may not be complaining, but some may be surprised. See Life After Winning a Nobel Prize. Martin Chalfie, won the 2008 Nobel Prize in Chemistry, lamenting that since the Reagan era when the tax code was changed, the IRS collects tax on prizes just like any other income.
President Obama cleverly avoided tax on his Nobel Peace Prize last year—and got great press—by regifting it. Since Jerry Seinfeld’s eponymous series brought “regifting” out of the closet, 60% of women and 40% of men admit they regift. There’s even a “Gift and Re-Gifts” neighborhood on eBay.
Before 1986, many prizes were tax-free as long as no significant services were involved. Since 1986, though, prizes and awards are taxable.
You can decline an award, as George C. Scott did an Academy Award for Patton in 1971. You can even decline a Nobel Prize to avoid the tax. That’s actually surprising, since the tax law routinely attributes taxable income to you “constructively” when you could have received a payment but chose not to. See When You’ve Got Taxable Income but No Cash.
If you are awarded a cash prize you can turn around and give it to charity but that doesn’t avoid all the tax. Why? You can’t deduct charitable contributions exceeding 50% of your “contribution base”—generally your adjusted gross income. The limit is even lower (30%) for gifts to certain types of organizations. You can carry over excess deductions for up to five years, but in the meantime, are paying tax on monies you’ve given away.