Taxes on Kentucky Derby Winnings Could be up to 47.6 Percent

May 07, 2014

My home state was on national display Saturday evening with the Kentucky Derby, with California Chrome notching a win, finishing the 10 furlong ( 1.25 miles) race in 2:03.66 (a bit on the slow end for recent years, though Super Saver’s 2010 win was slower, at 2:04.45).

California Chrome is owned by two Nevadans who together formed the racing group “DAP,” for “Dumb Ass Partners.” They earned that name by racing a horse from an $8,000 mare and a $2,500 stallion: far lower prices than many other Derby contenders, who came from sires and dams with price tags often in the six figures. Meanwhile, California Chrome’s trainer, Art Sherman, is now the oldest trainer ever to win a derby, while the jockey, Victor Espinoza, is enjoying his second Derby win (Spinoza also won in 2002 on Kentucky-bred War Emblem, going on to win the Preakness, though took a disappointing fall out of the gate at Belmont). The jockeys with the most wins are Eddie Arcaro and Bill Hartack, with five each.

With the Derby win, the owners at DAP have not only the joy of seeing their horse decked out in roses, but also won a $1,417,800 prize: especially impressive for a $10,500 horse. That’s on top of $1,134,850 in prior earnings.

California Chrome is based, as the name would suggest, in a barn out of California. The owners are a partnership, with one partner living in Nevada, and one in California, and it appears that DAP is based in California.

With over $1 million in prior winnings, and assuming DAP is a pass-through entity, it’s reasonable to assume that all or most of California Chrome’s derby winnings (less deductible expenses, which are almost certain to be very large, but which are difficult to compute here) would be subject to California’s top income tax of 13.3 percent, creating $188,567 in tax liabilities. Federal income taxes could add up to $561,449, or 39.6 percent of earnings. Once the federal deductibility of state taxes is accounted for, federal tax liabilities would drop to $486,776, for total tax liabilities of $675,343, or 47.6 percent of earnings.

If, however, DAP were based in, say, Nevada, where one of the owners resides, there would be no state income tax liability, because Nevada has no income tax. Federal taxes owed would come to $561,449 (higher than California due to the effects of the deductibility of state taxes from federal income). With no state income tax, total taxes would be about $114,000 less in Nevada than California.

If the owners chose to make their partnership legally resident in California, they may be kicking themselves right about now, as doing so could have cost them over $100,000 of their Derby winnings. Then again, this time around, a California strategy seems to have taken home the roses, although for the first time in over 50 years. Congratulations are in order for a horse that fulfilled the dreams of its owners.

Of course, as a Kentucky native myself, I was disappointed that a horse from the Bluegrass (like one of those from my home county, Vicar’s in Trouble or We Miss Artie) didn’t win. Maybe next year!

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