How the IRS Takes the Gold After the Olympics

Olympic Gold Medal
Olympic Gold Medal

Team USA's biggest winner of the London Olympic Games may be the IRS.

Our Olympic medalists will rake in handsome rewards for representing their country, but they will also have to give a chunk back to Uncle Sam in taxes, notes the Americans for Tax Reform Foundation.

Under U.S. tax law, they must include the value of their Olympic medals and prizes in their taxable income. The precious metal in the medals is worth about $675 for gold, $385 for silver and under $5 for bronze. But medalists take in handsome cash prizes, too: $25,000 for gold, $15,000 for silver and $10,000 for bronze.

Assuming they're paying the top U.S. tax rate of 35%, that means Olympians would have to shell out $8,750 for winning gold, $5,250 for silver and $3,500 for bronze.

The British government has waived its right to tax Olympians' winnings, and the ATRF -- research arm for Grover Norquist's ultra-conservative anti-tax group, Americans for Tax Reform -- is publicly taking issue with the idea that U.S. citizens earning money abroad should have to pay U.S. taxes on it, according to Ryan Ellis, tax policy director for the ATR. U.S. policy differs from that of the majority of the world's countries, which don't tax their citizens for income earned abroad.

"The larger point is that the IRS should only seek income earned within the U.S. just like other countries," Ellis said. "We don't have the same system the rest of the world does and we should."

Sen. Marco Rubio (R-Fla.) introduced a bill earlier this week that would exempt Olympians from taxes on their winnings. Gov. Mitt Romney, the presumptive Republican presidential candidate, voiced support for this measure.

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But so far, there hasn't been enough of a lobbying effort to gain traction against what the ATR calls "double taxation," primarily because the number of U.S. citizens working and earning money abroad hasn't been large enough.

"How many people have overseas income?" Ellis asked. "It's a very small number, and in politics, the only thing to move anything is votes and money: There's not enough votes in this."

With increasing globalization and opportunities to earn abroad, that extra tax bite could actually become a disincentive to people returning to the U.S. to contribute to the domestic economy, Ellis suggests.

Already, Ellis says, many corporations with subsidiaries in foreign countries shy away from bringing their profits back to the U.S. because to do so would mean paying U.S. taxes on them.

"You don't have to pay the second tax to the IRS until you actually bring the money back here," Ellis said. "If you leave it overseas, the tax is deferred indefinitely. Our current system incentivizes people to stay overseas."

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But Corporations Aren't People

A closer look at this argument reveals a fairly obvious apples-to-oranges comparison being made by Ellis and the ATR: There's a big difference between how individuals and corporations are treated when it comes to taxable foreign income, as the White House's National Economic Council makes clear.

An American citizen who earns up to $95,100 overseas pays only the foreign taxes on that income. If he earns more than that, he pays U.S. taxes only on the amount earned above that threshold. More importantly, the taxpayer gets a U.S. tax credit for taxes paid to other governments. The result should be that, at worst, someone earning money overseas should pay no more overall than if all money had been earned here, and all the taxes in question were paid to the IRS. (And, thanks to loopholes in the system, it often works out that those workers pay less, the NEC notes.)

Corporations, by contrast ... well, that's more complicated, but the NEC website concisely explains the issue:

Companies Can Defer Paying Taxes on Overseas Profits Until Later, While Taking Tax Deductions on Their Foreign Expenses Now: Currently, a company that invests in America has to pay immediate U.S. taxes on its profits from that investment. But if the company instead invests and creates jobs overseas through a foreign subsidiary, it does not have to pay U.S. taxes on its overseas profits until those profits are brought back to the United States, if they ever are. Yet even though companies do not have to pay U.S. taxes on their overseas profits today, they still get to take deductions today on their U.S. tax returns for all of the expenses that support their overseas investment.

And it's questionable as to whether upholding a "territorial taxation" system -- in which taxes are paid only to the jurisdictions where the money is earned -- would benefit the U.S. economy, the NEC says.

"Pure territorial taxation is a $200 billion tax incentive for increasing jobs overseas, not for creating jobs in America," Principal Deputy NEC Director Jason Furman told DailyFinance.

Right now, an American multinational corporation will pay 12% in taxes in China, for example, and nothing to the U.S. If after five years, it decides to bring those profits back to the U.S., it will pay 23% on the earnings -- equaling the top U.S. tax rate of 35%, and never exceeding it.

"The notion that there's a double tax is completely absurd," Furman said.

And in reality, the NEC says, many U.S. corporations opt for added taxing flexibility by having a subsidiary in the Cayman Islands who will own the intellectual property and allow the company to pay only 2% in taxes. Some corporations will never bring that money back to the U.S.

President Obama has proposed an international minimum tax for foreign subsidiaries of U.S. corporations -- one they'd have to pay immediately, without a deferral. In theory, that would ensure that if a company had a choice between opening a factory in Ohio or China, there wouldn't be a huge tax advantage for choosing China.

In turn, the NEC says, the money raised from the minimum tax would allow the IRS to cut the corporate tax rate to 28% overall, which would help U.S. based companies.

Beyond the Olympic games, taxation on foreign income could be a hot-button issue in another contest -- the approaching presidential election.

Romney has discussed his approval of a strictly "territorial taxation" system. The NEC argues his plan would result in 800,000 jobs created ... overseas.

The ATR wants to extrapolate the issue of how Olympians are taxed, and apply it to the larger question of how the foreign subsidiaries of U.S. corporations are. Even for U.S. athlete Marquise Goodwin, that's a long jump.

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