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United States Space The Almighty Buck

Uncle Sam Spoils Dream Trip To Space 656

gollum123 writes about a dream come true and a dream dashed. Brian Emmett, a software consultant from the San Francisco Bay area, entered a contest sponsored by Oracle in 2005. He answered some questions on Java coding, won a free trip into space, and then reluctantly gave it up. The latter decision came once he had computed the taxes he would have to pay on the $138,000 prize — roughly $25,000. From the article: "Since the Internal Revenue Service requires winnings from lottery drawings, TV game shows, and other contests to be reported as taxable income, tax experts contend there's no such thing as a free spaceflight. Some contest sponsors provide a check to cover taxes, but that income is also taxable."
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Uncle Sam Spoils Dream Trip To Space

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  • by Patrik_AKA_RedX ( 624423 ) on Monday January 29, 2007 @07:01AM (#17797558) Journal
    "Some contest sponsors provide a check to cover taxes, but that income is also taxable."

    Last line from the summary.
  • by Ogemaniac ( 841129 ) on Monday January 29, 2007 @07:23AM (#17797662)
    the negative effect of taxes on the economy. While this example is extremely exaggerated, the same thing happens countless times on a much smaller scale every day - I don't buy that shirt, for example, because taxes make the price $22 instead of $20. An otherwise mutually-beneficial transaction is lost.

    Studies indicate that about fifteen cents are lost this way for every dollar the government collects for the major taxes (income, sales, property). That implies that the we have to spend a $1.15 just to get the government a dollar - and hence we always overpay for government services.
  • by grant050 ( 806347 ) on Monday January 29, 2007 @07:29AM (#17797694)
    FTA: ...report the $138,000 galactic joy ride as income...
    I heard American's don't have to pay income taxes, in this documentary, America - Freedom to Fascism.
    It's got an interview with a lady who was on a jury and neither the prosecutor or judge could state the law that says a person has to pay income tax. So the jury found 'not guilty'. America - Freedom to Fascism [thepiratebay.org]
    Disclosure: I'm Australian, I don't pay American taxes anyway.
  • by JaredOfEuropa ( 526365 ) on Monday January 29, 2007 @07:42AM (#17797784) Journal

    It is similar to what happens in countries like the Netherlands (or other nordic countries) where people *avoid* pay rises because sometimes having a rise of 10% they have to pay more taxes and end earning less than what they earned before the "raise".
    1) the Netherlands is not a "Nordic" country.
    2) there's no way that under the Dutch tax system a higher gross pay results in less net income. There used to be one threshold where that effect occurred: when you had to switch from the state health insurance to private insurance because of a pay rise, but these days it's all one insurance.

    With that said.... $25000 would definitely put this software consultant in debt. But for a trip into space I'd still be able to come up with the money.
  • Ah, I love Canada (Score:2, Informative)

    by xiang shui ( 762964 ) on Monday January 29, 2007 @07:43AM (#17797790)
    ...he wouldn't have had to pay a dime, Up North. Gifts or prizes are _not_ taxable.
  • by Anonymous Coward on Monday January 29, 2007 @07:48AM (#17797834)
    http://www.eminentbrain.com/ [eminentbrain.com]

    Saw it referenced several times in the article, but the address was never quoted.

    The entry in question is the top one on that page.

  • by Matje ( 183300 ) on Monday January 29, 2007 @07:48AM (#17797840)
    Personally, I think it is more about how fucked up taxes are. I agree on taxing cash prices but taxing these kind of prices is stupid. It is similar to what happens in countries like the Netherlands (or other nordic countries) where people *avoid* pay rises because sometimes having a rise of 10% they have to pay more taxes and end earning less than what they earned before the "raise".

    Care to point to a specific example?

    You do know that the Dutch income tax works with income brackets right? you only pay the higher tariff over the income above a certain threshold. So if the pay rise bumps your income into a higher tariff group, then the higher tariff will only apply to the excess income. Since the highest tariff is 52%, there is no way that you can end up earning less.

    A quick example: You earn 49,000 euros. You get a pay rise that bumps your income to 51,000. the 52% tax bracket starts at 50,000, while you pay 42% up to the 50,000 limit. You'll pay 42% over the first 1,000 and then 52% over the next 1,000. So the 2,000 pay rise will cost you 420+520 euros in tax (47% of the pay rise). After taxes you have 1060 euros more to spend.

    I think there is a very good reason to tax these kind of prices. Quite simply if you would not tax prize money, then people would set up fake lotteries and awards to cheat the income tax.

  • by shani ( 1674 ) <shane@time-travellers.org> on Monday January 29, 2007 @07:48AM (#17797842) Homepage
    It is similar to what happens in countries like the Netherlands (or other nordic countries) where people *avoid* pay rises because sometimes having a rise of 10% they have to pay more taxes and end earning less than what they earned before the "raise".

    In the 6 years that I've been in the Netherlands (3 as a manager), I've never known anyone to turn down a pay raise. (If you know such people, please let me know... we might want to hire them.) The system does not work as you describe. Making more money always gives you more money.

    There may be other reasons to worry about a high income, such as being forced to leave rent controlled housing, but this is not tax related.
  • by Anonymous Coward on Monday January 29, 2007 @07:58AM (#17797910)

    I think there is a very good reason to tax these kind of prices. Quite simply if you would not tax prize money, then people would set up fake lotteries and awards to cheat the income tax.
    Hmm. To the best of my knowledge, most countries don't tax prizes or betting winnings.

    Certainly my country (the UK) does not - and I've never heard of anyone evading tax via fake competitions or lotteries.

    There used to be a tax on sports betting winnings - but nowadays the bookmaker pays a tax on his profits.
  • by patio11 ( 857072 ) on Monday January 29, 2007 @08:40AM (#17798144)
    That would be considered income, because no "arms-length" transaction would have resulted in a sale of a trip into space for $1. Accordingly, the difference between the fair market value and the $1 was a gift to you. Gifts are income. You can even give someone money by not taking money away from them! Observe: I extend my neighbor Bob a loan this year for $5,000. Next year, I say "You know, forget about that loan". BLAM. He has to declare an extra $5,000 (plus fair interest!) in income, and I have to fill out a Form 1099-C attesting to that amount (which, naturally, tips the IRS off to the fact that if Bob doesn't disclose the value of the loan was forgiven to go after him).

    All sorts of things are income, although many aren't routinely claimed as such. Ever won a soda at McDs during that Monopoly promotion? Income. Found a $10 bill on the sidewalk? Income. Taken a pen home from work? Income, unless you returned it. The difference between these and the space trip is that if you had somehow neglected pay $25,000 worth of taxes because of your income, as opposed to a few cents, the IRS *will* hit you like a ton of bricks.
  • Does it really... (Score:2, Informative)

    by xuixinho ( 1044246 ) on Monday January 29, 2007 @08:51AM (#17798210) Homepage
    Does it really work like this? Where I live (Portugal), whoever offers the prize is responsible for all the taxes associated with it. Think of the lottery, the announced prize is always "exempt" of taxes for the winner. And I said "exempt" because taxes are still paid by the contest maker.
  • by SNR monkey ( 1021747 ) on Monday January 29, 2007 @09:00AM (#17798274)
    If the GP was talking about Powerball [powerball.com], he was correct. From the page:

    IS THE CASH AMOUNT THE JACKPOT AMOUNT AFTER TAXES?

    No. When we advertise a prize of $100 million paid over 29 years (30 payments), we actually have less than $50 million in cash. When someone wins the jackpot and wants cash, we give them all of the cash in the jackpot prize pool. If the winner wants the annuity, we invest the $50 million in cash to fund the annuity payments. [snip]

    Federal and State Income tax apply to whatever income you actually receive in a given tax year, whether it is wages or lottery prizes. If you take the cash amount (say $50 million), then you pay income tax on $50 million). If you take the annuity (say $100 million), then you pay income tax on the money you actually receive each year. Just like your wages, a withholding amount is required to be taken out immediately. The lottery will send you a W2-G form and you figure your actual tax at tax time.
  • by Beyond_GoodandEvil ( 769135 ) on Monday January 29, 2007 @09:11AM (#17798372) Homepage
    In the US, taxes are unconstitutional for any reasonable interpretation of the constitution.

    Prior to 1913 you would be correct; however, quoting the 16th amendment to the US Constituition, "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

  • by arth1 ( 260657 ) on Monday January 29, 2007 @09:23AM (#17798434) Homepage Journal

    I think they buy an annuity payable to the winner over the next 25 years or so. The cash option is the amount that would go to buy the annuity if you had selected annual payments.
    Apparently, this depends on the state. Minnesota appears to do it this way, while Florida appears to be self-insured, and invests the money in the lottery itself - the small print on their web page states that the future payout is contingent on the sales equaling the sales of the drawing where you won.

    Also worth noting is that out-of-state winners tend to have to pay state income tax twice: The state income tax is withheld by the lottery no matter what, and you have to pay your state's income tax. Then you get to deduct the doubly paid amount on the next year's taxes, if you manage to get all the correct forms and statements. Net effect: Tax lawyers get a little richer.

    Regards,
    --
    *Art
  • by TapeCutter ( 624760 ) on Monday January 29, 2007 @09:25AM (#17798454) Journal
    I'm not sure about other states but here in Victoria the state govt takes ~15% of lottery and other major gambling transactions (excluding the stock market ;). The organiser is also restricted on what percentages they can take. In the main the taxation and profit percentages on gambling is fairly transparent and distributed amoungst all players.

    There are a lot more gambling options here than there were 30yrs ago and the state rakes in the revenue. There has been a well publicised "increase in problem gambling", or mabye it's just a "problem" because it shifted from "husbands and horses" to "housewifes and pokies". Just my impressions, no hard stats, and I'm almost positive I'm over-generalising the sexes.
  • by autophile ( 640621 ) on Monday January 29, 2007 @10:16AM (#17799016)

    Gifts are income.

    Wrong.

    I hate how this myth keeps getting perpetuated. See my previous explanation [slashdot.org].

    --Rob

  • by Anonymous Coward on Monday January 29, 2007 @11:05AM (#17799656)
    Now, without "enforcement of law and public order, protection of property,

    This was done before there was even a federal income tax.

    economic infrastructure (roads, legal tender, enforcement of contracts, etc.), education systems, health care systems" would you be able to work?

    People did for a long time before there was a federal income tax, or any of the bazillion taxes the US has now. Also the two things you listed at the end...education and healthcare are both better handled privatly than through the government.

  • by Directrix1 ( 157787 ) on Monday January 29, 2007 @11:30AM (#17799974)
    Well, I don't like being an ass... but I'm good at, so here I go. OK, lets say there is a 25% tax on gifts. You just won a 100,000 item where they promised to pay your taxes. The equation for the total amount they'd have to give you to cover taxes is as follows:
    x = 0.25(100,000 + x) ---- Thats 25% of the sum of 100,000 and itself
    4x = 100,000 + x
    3x = 100,000
    x = 33,333.33 ----- Thats it, it pays for itself and the gift. Tada!
  • by UbuntuDupe ( 970646 ) * on Monday January 29, 2007 @11:34AM (#17800018) Journal
    Under the scenario you described, you would still be taxed. You'd have to sell the luxury car to get money (people wouldn't completely revert to barter) and that would have to be reported as taxable income. True, with a little work, exempting non-money compensation from taxation *could* gradually lead barter networks to form, but not in the scenario you've described.

    That said, in order for the trip not to be free, they'd have to pay the $25,000 tax, then (as the summary notes) pay the tax on the $25,000 tax payment (since that's additional compensation), then the tax on the tax on the tax, etc. Luckily, the series converges!

    More importantly, who decided that the trip was worth $138,000? Is there a liquid market in spaceflights? Why couldn't they declare it to be a special, "discount" trip worth $5? Note that this is similiar to the record industry declaring the "value" of "stolen" music -- how much would it really have sold for? And note that unlike the luxury car, this good is not transferrable.
  • by Anonymous Coward on Monday January 29, 2007 @12:04PM (#17800432)
    That's simply not true. In Canada, you get taxed at the rate specified by a given bracket by the amount WITHIN that bracket. So, your first ~$8500 is covered by the basic personal deduction (i.e. "tax-free"), the next ~$29000 is taxed at 15.25% federally (for 2006), the next ~$37000 is taxed at 22% federally, etc.

    If you make $37499 (if my numbers are correct -- regardless it's the the very top of the 15.25% tax bracket), and get a $1000 raise, the only effect is that $1 of that is taxed at 15.25%, and the remaining $999 is taxed at 22%. So, that extra $1000 is essentially an extra $780 in your pocket (well, before provincial taxes, which I'm ignoring for simplicity, but they work mostly the same way). Sure, that $1000 raise would be worth more if you were only making $30k (i.e, worth $847.50 before provincial taxes), but you never lose money by making a raise, unless you're talking about claw-back of benefits, which is a different issue.
  • by Skal Tura ( 595728 ) on Monday January 29, 2007 @12:05PM (#17800448) Homepage
    That sounds A LOT like here in Finland, except here isn't that kind of insecurity. Insecurity yes, but not deadly.
    Here, there's a lot of talks, stories etc. (rarely gets to the press, but a few does) about security companies employees beating people for no reason, but that's the top of the iceberg. You gotta watch over your shoulder on our capital city and nearby cities
    when going to trainstations, there's people who might try to beat you off just because you don't give them a cigarett or you look
    too good for their liking or rich.
    None of those are Finnish, but mostly immigrants and such. (Now i will be called a racist).
    If you are jumped and you defend yourself, you will at bare minimum get fines, probably jail. I did this once, i was 16 (that day
    actually was my birthday!), and that guy was ~35yo weighing ~150kg. Defended myself at all means possible, i got sued by
    goverment, initially with attempted kill. Finally, they decided i was innocent, but still fined me for 120euros... and all i got
    was 180e per month back then. What saved me was that i was still a teenager, but it did require a very good lawyer.

    Back on the subject, taxes are insane here too.
    If you are an employee, you will pay personal tax of upto over 60% + unemployment fees (2,5%) + church (1%) + health (1,5%) (hope i remember those right), if you happen to have money in the savings account, 28% tax from interest.
    Everything has VAT 22%, except food 17%. Gasoline has total tax of ~70%, Diesel a lot less but don't remember the pct at all, it
    costs ~30% less, while in truth it costs more to manufacture.
    If you buy a 2000e car from Germany, you might have to pay even upto 8 000e of taxes on it if you are unlucky.
    If you are entrepreneur, minimum total taxation is almost 50%, for other company form it's ~30% but then you get also personal
    tax on top of that.
    Also, from all sales you have to pay VAT, but fortunately if your payed VAT (when you buy something, loss) exceeds the amount of
    stuff you sold or equals no VAT to pay, and i think they even pay you back if you've paid too much in VAT taxes.

    A real life example: monthly salary ~1350e, you get in your hand ~1050euros, apartment (cheap but spacy for one, about 50m2)
    ~450e, food for the month (1person) 150e, cheapest work travel 40e, and electricity ~30e/month, internet connectivity ~30e/month
    and ~+220e for apartment from goverment.
    I would think that's the minimal requirements for somewhat enjoyable life, and you are left with 570euros/month.

    Currently, if you own a car minimum payments for the year are yearly inspection, car tax and traffic insurance.
    Traffic insurance is lower for newer and more expensive cars. My -84 Corolla yearly insurance is ~880e, car tax ~100e, inspection
    is ~50e. That's over 1 000e just to keep the car, and the car costs ~1200e. Now they are trying to remove the car tax, install
    GPS on every car (or some other tracking method) and issue a tax for every km you drive + add an emissions tax, which naturally
    be higher for older & cheaper cars. Top that of that driving with natural gas (aftermarket installation) as a civilian, not
    working on transportation business and not a car used for work is not allowed, and what i understood from department's texts,
    the fine is over 300euros per day!

    For all the taxes you pay here, only thing working somewhat well is social safety net (you will always have apartment etc. if you
    are even somewhat sane, and bother to fill out couple forms). Education is bad, healthcare seems to be more like deathcare etc.
    Oh yeah, own a house & some land? You own that land only 1m deep, someone finds gold under 1m and wants to digg it, they are
    allowed to. City wants the land? No worries, you'll still get something like Market Value -40% for it.

    To top that off, summers they lay on the roads saltwater "to keep dust down", which actually makes the roads slippery, and what
    when it dries? You get dust + salt!
    During winters, they lay ou
  • by agibbs ( 729458 ) on Monday January 29, 2007 @12:31PM (#17800862)

    That is an old interpretation of the 16th amendment. The current Supreme Court interpretation "income" is in Commissioner v. Glenshaw Glass Co. (348 US 426 [findlaw.com]) Which states that "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion" are properly taxable by the Federal government. The IRS as adopted this definition in the tax code ( 61(a)). In plain terms this means "income" is anything that the government has not expressly exempted from taxation.

    You may argue that this was not the original intent of the 16th amendment, and who knows you may be right, but it is the current constitutional interpretation of it by the United States Supreme Court.

  • by KagatoLNX ( 141673 ) <kagato@s[ ]a.net ['ouj' in gap]> on Monday January 29, 2007 @03:18PM (#17803338) Homepage
    Actually, in higher mathematics it has already been determined that, under the right circumstances, a sum with an infinite number of values can converge to a finite number. In the case of a simple percentage like this, I believe as long as it is less than 100%, the sum will converge.

    Why not just pay him $168,292.68. 18% tax on that yields $30,292.68 leaving $138,000.00. How is this not possible?

    Even if there are other taxes, as long as they don't go over 100%, a finite sum must exist. Furthermore, there are numerical algorithms that can be used to optimize the most stubborn of these sorts of problems by doing trials with differing values attempting to calculate this.

    Infinite sums aside, banks, real estate agents, and title companies make the same calculations every day. It's really not rocket science.

He has not acquired a fortune; the fortune has acquired him. -- Bion

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