How Much Could Ryan Lochte Cost the IRS?

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By Zara Kessler

As the U.S. Olympic team finishes its stint in London, top athletes will come home laden not only with medals but also with quite a bit of cash. If Senator Marco Rubio has his way, those winnings could cost the Treasury a hefty amount in tax income.

Rubio has proposed a bill -- which White House Press Secretary Jay Carney said this week that President Barack Obama would support should it land on his desk -- to exempt Olympic cash prizes from taxation. As my colleague Josh Barro has noted this complication to the tax code is both unnecessary and unwarranted.

But the bill's language, as it stands, is also sufficiently vague as to involve much larger tax breaks than first meets the eye. It's not only the medal honorariums offered by the United States Olympic Committee -- $25,000 for gold, $15,000 for silver and $10,000 for bronze -- that would come tax-free. The bill reads, "Gross income shall not include the value of any prize or award won by the taxpayer in athletic competition in the Olympic Games."

As such, the exemption would also seem to cover the financial rewards various sports federations pay their athletes. USA Wrestling offers $250,000 for gold, $50,000 for silver and $25,000 for bronze. USA Triathlon gives $20,000 for gold, $10,000 for silver and $5,000 for bronze. Michael Phelps can rake in $75,000 from USA Swimming per gold medal, with an extra $50,000 bump for a world record.

That's not to mention tax breaks on endorsement deals that include bonuses for medals. As K. Sean Packard, a certified public accountant who specializes in preparing athletes' returns, wrote on TaxTV's blog:

Any agent worth his/her salt would ensure that most, if not all, endorsement contracts for an Olympian include hefty bonuses for medals. ... Assuming each of Phelps’ and [Ryan] Lochte’s endorsers match the USOC’s medal bonuses of $25,000, Phelps could receive $300,000 tax-free from the USOC and his eleven endorsers for each gold he wins.

Talk about a win-win! In the future, endorsers could hold back the big bucks until their athletes end up on the podium. Top athletes won't have to pay taxes on those big bucks. The only one losing is the IRS. And of course, the ordinary Americans whose faces don't appear on cereal boxes.

(Zara Kessler is on the staff of Bloomberg View. Follow her on Twitter.)

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-0- Aug/10/2012 19:07 GMT