Palin’s Probably Taxable Clothes

October 23, 2008

TaxProf Blog covers the main points regarding whether the $153,340 in clothing, hair care, and makeup received by Sarah Palin from the Republican National Committee over the last few months is taxable income. Bloomberg also has a well-written article.

The Internal Revenue Code allows a deduction for the purchase and maintenance of uniforms and clothing used in a job. However, this deduction is very narrow with the requirements that the clothing be required by your employer and that it be unsuitable for everyday wear. (Hence, my friend who works in a clothing store and is required to wear his store’s brand cannot claim the deduction.) Since Palin’s clothes are suitable for everyday wear, and more importantly, since she is not employed by the Republican National Committee (a disputed point), she likely cannot claim the clothing deduction on her income tax.

The RNC has claimed that the clothes would not be taxable income to Governor Palin because they intend to donate them to charity after the campaign. In practice, however, such donations rarely recoup the cost of the purchase, particularly of designer clothes. From the Bloomberg article:

Designer clothes, in particular, can be worth much less than their original value after they are donated. In the case involving a former Goldman Sachs banker, the U.S. Tax Court disallowed $40,005 of a $48,954 charitable deduction that the banker claimed for designer shoes and clothes given to a New York thrift shop.

If the IRS determined the clothing is taxable income to Palin, she might be able to deduct about 18 percent of their value, or $28,000, using the Tax Court decision as a guide. That would leave her owing taxes on about $126,000. Based on her 2007 income, she would be in the 33 percent bracket and owe roughly $42,000 in taxes.

This sounds correct—the clothes are not gifts but compensation. (And if they’re gifts, the gift tax comes into play…)

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