Different lines of work come with different types of earnings and tax implications. Some people might wonder how artists or athletes handle their taxes, given their source of income and the nature of their work. The best of the best can earn significant sums when competing—and these earnings are subject to some form of taxation!
If you’re an athlete who has already earned from competing or training to compete in the big leagues, then considering athlete financial management may be the best course of action for you.
Today, many athletes are lucky enough to experience tax-free winnings just by making it onto the podium at the Olympics, but current tax guidelines weren’t always so generous. In 2016, the US Congress and President Obama made it possible for future US Olympians and Paralympians to be exempted from federal taxes on their cash and medal awards. Other sources of income and sponsorships, however, still remain fully taxable.
While this applies to most Olympians who are able to place, there are some exceptions for the non-taxability of competition winnings. Olympians can win over the hearts and minds of the American people, and their impressive performance and representation at the games often turn them into status symbols overnight. This can translate into lucrative endorsement contracts and engagements ranging from months to years after an athlete’s winning year is concluded. This also leaves a dramatic effect on the medalist’s public and financial legacy for decades to come.
Measuring an athlete’s AGI—or general gross income, before the medal, cash award, and itemized deductions—can determine their taxability. Once the AGI crosses the $1 million threshold, the differences between Olympians with significant endorsement contracts and those without will determine who pays taxes on their performance awards. Examples of well-known winter Olympians who do not meet this exemption are Shaun White and Mikaela Shiffrin, who have estimated net worths amounting to $45 million and $2 million, respectively.
Aside from their endorsements, financial planning for athletes should be done for other sources of income. The medals that winners come home with—gold, silver, or bronze—carry an intrinsic value, or value relating to the raw materials used to make the medal. First placers may be surprised to find that their gold medals only contain about 6 grams of gold, or 1% of the entire medal, which has a balance made of silver. Silver medalists receive a purely silver token, while bronze medals are alloys made of 90% copper and 10% zinc. These intrinsic values range from $635 for gold, $351 for silver, and just $3.65 for a bronze medal, based on pre-Olympic commodity prices.
This is not the case for extrinsic values, which tend to be exponentially greater and varies depending on where you look on the market. How much Olympic medals are worth is influenced by the sport, the athlete’s history, and the win’s historical significance. These make it possible for a medal to cost as much as a few thousand dollars or more.
However, not having a high intrinsic value is advantageous from a tax standpoint as these aforementioned values will be used as the athlete’s tax basis. The greater the intrinsic value, the greater the taxable value.
Navigating an athlete’s winnings and other sources of income can be tricky when it comes to taxes, especially with exemptions that aren’t covered by the 2016 decision of Congress. With the right financial management plan catered specifically to athletes in their sport, winners can come home knowing that their finances are in more reliable hands.
Giving the right financial advice for athletes takes representatives with expertise in that area. Aaron Parthemer, president and CEO of PMG Private CFO Services, runs an accounting firm that services athletes, entertainers, and executives to manage their day to day lives. Get a free guide on financial tips for athletes and connect with Aaron for your financial needs today!