Whether winners or losers at one of Hollywood’s star-studded award shows, most celebrity nominees can expect to walk away from events loaded down with expensive swag.
Extravagant goody bags have become a staple at the Oscars, the Grammys, the Golden Globes and the Emmys. The “Everyone Wins” bags provided by Los Angeles marketing firm Distinctive Assets for this year’s Oscar nominees were each worth a whopping $100,000 (last year’s were worth even more, $232,000). Delivered to contenders in the event’s top categories, the bags included everything from pricey “smart” electronics to a getaway to a five-star hotel in the coastal town of Sorrento, Italy.
But as many know by now, these goodies aren’t really “free.” The Internal Revenue Service treats them as taxable income to the performers, who will receive a Form 1099-MISC, Miscellaneous Income, and must include that information on their federal tax returns. Single filers earning an annual income of more than $418,401 will owe 39.6 percent—or $39,600—in taxes on the 2017 swag bag.
High-net-worth celebrities who think they can avoid paying the tax man by donating the goody bag’s contents to charity might be sorely disappointed when they realize how little they can actually deduct.
“They can make a charitable contribution, but the problem is charitable contributions are going to be limited to 50 percent of their adjusted gross income, and you have a phase-out for itemized deductions when your adjusted gross income exceeds certain values,” said Narelle MacKenzie, an accounting lecturer at San Diego State University’s Fowler College of Business Administration.
The 50 percent rule is typically less of a limiting factor because most people won’t donate half of their income to charity, said Mark A. Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. However, the phase-out can significantly reduce the charitable deduction, especially for extremely high earners, he said.
The phase-out limitation cuts the amount of deductions a person can take by 3 percent of AGI above $261,500—the threshold for a single filer in 2017—but the taxpayer can’t lose more than 80 percent of the total deduction.
For example, assume there are no other allowable itemized deductions and a celebrity who’s a single tax filer with an AGI of $3 million donates the entire $100,000 swag bag to charity. That $100,000 is an eligible itemized deduction. With a $3 million AGI, the donor is $2.74 million over the $261,500 threshold. Three percent of $2.74 million is $82,155. Since that number is more than 80 percent of $100,000, the loss would be capped at $80,000, and the celebrity ends up with a $20,000 deduction on the donation.
But all is not lost. Celebrities can avoid the goody bag tax altogether by simply not accepting the gift, MacKenzie said.
Additionally, a spokeswoman for Distinctive Assets—which is also the preferred provider for the coveted Grammy gift bag worth $30,000 this year—pointed out that more than 90 percent of their bags’ contents fall under the category of gift certificates or “gift offers.” “In the case of gift certificates and other ‘gift offers,’ there is no value to the celebrity unless they actually redeem a gift certificate,” the spokeswoman said.
Luscombe pointed to guidance on the tax treatment of gift bags posted to the IRS website in the form of questions and answers (https://www.irs.gov/uac/gift-bag-questions-and-answers). The guidance clarifies that a person has to both “accept” and “redeem” non-transferable certificates or vouchers for these to be considered taxable income.
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