Just for fun, let's take a look at how much Uncle Sam wins every summer from Big Brother. Some of you know that I am actually a CPA with my own tax practice. Today is the filing deadline for 2016 tax returns --- I have been working every day since December 27th so I am quite happy today is finally here. In fact, I plan to be nearly incoherent in just a few hours, which can't come soon enough for me.
The tax deadline is usually April 15th, but due to weekends and an obscure holiday, we all got a few more days to make things happen this year. At this point, I'm dealing primarily with people who require A LOT of patience, which is running low right about now.
Did I say "low"? I actually mean, "very, very, very low".
So like I said, just for fun I ran a tax return for a hypothetical winner here in the US, so we could all get an idea of how this works. I have assumed the following, which may or may not approximate reality:
* The winner of BB is a 20-year old with no dependents, and no other (reported) income.
* The winner of BB is also not a dependent of someone else.
* The BBUS grand prize of $500,000 was reported on Form 1099-MISC in Box #3, as "Other Income", which is appropriate as this is how prizes are reported, as compared to payments made to a worker, which are reported in Box #7 ("Nonemployee compensation") and also face steep self-employment taxes in addition to income taxes.
* The winner of BB does not itemize deductions, instead taking the standard deduction.
* The winner of BB had qualifying health insurance coverage all year, avoiding the dreaded "Fair Share" tax assessment (i.e: the "ObamaCare" penalty).
And here is the result:
Federal Tax Due $151,675
Underpayment penalty 3,626
Total Due to the IRS $155,301
Ouch, huh? That hard-fought prize money just got whacked down to $344,699, and we haven't even looked at the state taxes yet. Note that the IRS is a "pay as you go" system, meaning that they expect you to make tax deposits regularly throughout the tax year, rather than in one big chunk at year end. If you don't pay in enough through payroll deduction or other quarterly payments, they charge an underpayment penalty. (This differs from the "Failure to Pay" or "Failure to File" penalties, if you're keeping score at home.)
I'm pretty sure that CBS will withhold some taxes from the payment for you, if requested to, but penalties would still be incurred since the payment would have occurred near the end of the tax year.
And now for the state taxes.....the winner of BB US also has to file a California state tax return, because that is where they earned the money. In fact, each BB contestant should file a California state return, because they also earned their stipend or prize money while "working" in California.
Fun Fact: Professional sports players have to file a tax return in each state they play in.....nobody needs a good professional money manager they can TRUST more than a professional athlete.
So, California might be a beautiful state, but their state individual tax form is not very aesthetically pleasing.
And that's another $47,544 that the "lucky" BB US winner needs to shell out. So now we need to update the prize money for this financial setback.
BBUS Prize Money $500,000
Federal Taxes Due (155,301)
California Taxes Due ( 47,544)
Prize Money, Net of Taxes $ 297,155
And we haven't even paid the CPA's bill yet! And note to any future BB winners, if your tax return is actually this simple, you shouldn't be charged more than just a few hundred dollars for it.
*** TAX DAY BONUS ***
Today the accounting world was abuzz with this news, that also quickly became tabloid fodder. (You can read the entire article here.)
Look, the IRS doesn't just "drain" your bank account out of nowhere. Before they actually make any withdrawals, they send you all sorts of scary letters and notices that they plan to do this. The letters and notices are sent on a schedule, slowly escalating until they have no choice but to get the seizing underway.
I've seen the scary letters and notices, and it makes my heart pound to even think about it. But I've never seen a situation where the assets are actually taken. Tori should have given the letters and a Power of Attorney to a reliable CPA or probably even a Tax Attorney to communicate with the IRS on her behalf. Maybe even negotiate a settlement, and a time frame for clearing things up.
There's no need for any seizure like this to take place, if you have the right people helping you, and the will to clear it up.
Poor little rich girl, huh?