Game show payoffs are getting bigger as winners figure out how to play the loopholes in the rules. But don’t get too eager to cut the IRS out.
A new fiscal quarter means James Holzhauer has now had to make the last estimated tax payments on his record-breaking Jeopardy income.
On paper, he won $2.5 million. After mandatory withholdings to satisfy the Californian system, he went home with about $1.3 million.
It’s still not a bad payout for 32 days of work, but someone who loves to play the angles as much as he does is always looking for a kicker.
Was there a way to claw back the government’s take from his prize? Ironically enough, the usual back doors for shielding wealth are nailed shut here.
After all, if there was a way to bend the system of how game show winnings are taxed, he would’ve put the moving parts in place before the camera even started rolling.
Earnings versus assets
Most tax conservation efforts start by shifting assets out of individual ownership into a trust subject to different IRS rules.
Once wealth is in the trust, it can compound more efficiently and ultimately end up worth a whole lot more.
That’s why Silicon Valley billionaires and private equity barons tend to give their founder shares to a family trust.
At the start-up stage, the stock isn’t all that valuable, but at the end of the story, the ultimate beneficiaries will get billions of dollars in income.
It’s also why intellectual property like patents, sound publishing and novels goes into trusts as well. If you’ve built it and it looks like it’s going to become substantially valuable, build a trust around it.
But we’re talking about assets that have yet to trigger a taxable event. Whenever Holzhauer plays to win, he’s earning income, which is generally taxed when awarded.
Once he pays that income tax on 1099-MISC game show winnings (or gambling proceeds for that matter), he can do whatever he wants with what’s left.
He can hand it out to friends and family in chunks small enough to avoid triggering gift tax, as some have suggested. That’s a great thing for his estate, but we’re still working with post-income-tax dollars.
And he can’t set up a trust in advance and play “for” it the way celebrities sometimes donate their prizes to charity.
That’s just not the way game show release forms work. Individuals play, players get the money and the money gets taxed.
Winners can still make contributions in order to reduce their taxable income and make a difference in the world, but “donating” to a trust isn’t really an option either.
In theory, Holzhauer could have set up his own foundation and played in its name, sending every dollar back into its system where (again, theoretically) friends and family could share the benefits.
But that’s a lot of complication in the name of saving $1 million. Even a game show champion is still in the world of the merely affluent, not moving billions around.
Finally, we hear about people who buy lottery tickets and give them to their trusts before the numbers are called.
Again, the ticket is an asset that can be transferred. Money you make for winning a game doesn’t work like that.
Easy come, easy go
Guidance is a little more nebulous around whether Holzhauer could have played as a member of a limited liability company or partnership.
In that world, the taxes and winnings would get split up, much like members of a betting syndicate bankroll all chip in and then divide the take.
Holzhauer didn’t really need to come up with a lot of cash to compete on Jeopardy. There aren’t even a lot of expenses to deduct.
Unless I’m ignoring something extremely devious (that he ignored too), he’s basically stuck with only half the payout he officially earned on the show.
That’s okay. Game shows set their prize budgets arbitrarily and the Holzhauer effect boosted buzz around Jeopardy to its highest level in ages.
If “only” $1.3 million after taxes is the going rate for that, then everyone will be happy.
And Holzhauer is now a known draw. While he busted in the recent World Series of Poker, he could probably compete under special rules if he ever makes a game show comeback.
The show doesn’t care how much money the IRS gets, as long as it gets its regulatory cut.
Letting Holzhauer compete as a corporate entity may be the way to lure him back without breaking the budget when ratings flag.
After all, $2 million to the Holzhauer Family Trust stretches a lot farther than $2 million paid through a 1099-MISC.
But we’ll just have to see. In the meantime, he can invest in other players, coaching them for a share of their winnings.
Again, a trust can hold the financial interest on that side, as though they were a lottery ticket or betting bankroll stake.
At that point, though, he could just as easily be investing his remaining $1 million in any legitimate business. The trust holds the shares. The beneficiaries get the income.
He lives in Nevada so setting up an asset protection trust there should be relatively simple. In that scenario, he’d hand off oversight of the trust to someone else and still receive the money it throws off.
Either way, he’s had his winning run and taken what he could. One more Daily Double is always great, but you’ve got to know when to cash out.
That’s already happened here. Time to make sure the remaining cash stretches as far as it can without additional tax drag.
