When watching the Paris Olympics this summer, think of the athletes pushing the boundaries of human potential. These athletes dedicate years, often decades, to perfecting their craft, all for the chance to stand on the podium and receive a medal. However, behind the scenes, there’s a less glamorous aspect that many might not consider: the taxation of their prize money. Fortunately, legislative changes made in 2016 have provided some relief for these dedicated individuals.
The Taxation of Prize Money: A Brief History – Historically, the Internal Revenue Service (IRS) has taxed almost all forms of prize money and awards. This includes winnings from lotteries, beauty pageants, television game shows, and yes, even Olympic medals. The rationale is straightforward: prize money is considered income, and income is subject to federal taxes. This rule has been in place since 1986, and it has applied uniformly across various types of awards.
For U.S. Olympic athletes, this meant that their hard-earned prize money was subject to federal income tax. In the past the U.S. Olympic and Paralympic Committee (USOPC) has awarded $37,500 to a gold medal finisher, $22,500 for silver, and $15,000 for bronze. The tax on these payments could significantly reduce their take-home earnings. The actual value of the medals based on the weight of the metallic components is substantially less than the monetary awards, but still counted as income.
Legislative Relief: HR 5946 – Recognizing the unique nature of Olympic achievements and the financial burdens faced by many athletes, Congress passed HR 5946, known as the United States Appreciation for Olympians and Paralympians Act, in 2016. This legislation exempts prize money from the United States Olympic Committee to participants in the Olympic or Paralympic Games from federal income tax for athletes who earn less than $1 million annually (without regard to the prize money).
The bill was a bipartisan effort, reflecting a shared belief that athletes representing the country on the world stage should not be penalized for their success. The exemption applies to both the cash prizes awarded by the U.S. Olympic Committee and the value of the medals themselves.
The Impact of the Exemption – The passage of HR 5946 has had a significant impact on Olympic athletes, particularly those who do not have lucrative endorsement deals. For many athletes, the prize money they receive from winning a medal is a crucial source of income, helping to offset the costs of training, travel, and equipment.
Without the tax exemption, a gold medalist earning $37,500 could see a substantial portion of their prize money—up to 37%—go to federal taxes. For athletes who rely on this income to support their training and living expenses, this tax burden could be a significant financial strain.
Starting with the 2024 Paris Olympics, the international sports governing body World Athletics (WA) will award $50,000 to athletes winning gold in each of the 48 track and field events, with athletes on gold relay teams sharing the $50,000 prize. The plan is to extend payments to silver and bronze winners at the 2028 Olympics in Los Angeles. Another organization, the International Boxing Association (IBA), has indicate that it will be awarding cash payments to Olympic boxers. Since only payments from the United States Olympic Committee are exempted from U.S. federal tax, a payment from WA, IBA or any other sports association will not be exempt, unless Congress revises the law to broaden the exemption.
The Million-Dollar Threshold – It’s important to note that the tax exemption only applies to athletes who earn less than $1 million annually. This threshold ensures that the exemption benefits those who need it most—athletes who do not have substantial income from endorsements or other sources.
For high-earning athletes, the tax on their prize money remains in place. However, given their additional sources of income, the impact of this tax is likely to be less significant. These athletes often have endorsement deals worth millions of dollars or have well-paying “day jobs” as professional athletes, making the tax on their Olympic prize money a relatively minor expense.
For now, most U.S. Olympic athletes can take solace in knowing that their prize money is protected from federal taxes, allowing them to focus on what they do best: representing their country and striving for excellence on the world stage.
Enjoy the Olympics.
If you have questions or need assistance with the latest tax laws, contact the Experts at Henssler Financial:
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- Email: experts@henssler.com
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