Leonard E. Burman (Syracuse University, Maxwell School) follows up on Friday's post, Tax Consequences of President Obama's Nobel Prize:
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 transfered 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.)
I won't cry myself to sleep thinking about the president's extra tax burden because he can reduce other charitable contributions if he wants, but it is another example of how complex and counter-intuitive our tax system can be.
- CNN Money, Will Obama Pay Taxes on His Nobel?
- Don't Mess With Taxes, Obama's Nobel Prize Tax Implications
- Tax Foundation's Tax Policy Blog, Congratulations and a Reminder
