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According to an article published today in several media outlets including Fortune magazine, George Clooney once gave 14 of his friends $1 million dollars cash. The article also claims that Clooney paid the taxes on all of it so his friends could accept the money tax-free.

The friend group, dubbed “The Boys,” reportedly helped support Clooney when he first came to Hollywood, letting him sleep on their couches and offering additional support. The Ocean’s Eleven star said he wanted to let them know how important they were to him.

As a kicker, Gerber added, Clooney said he also had paid the group’s taxes.

How is this possible? First of all, how did Clooney know everyone's tax rate, and second of all, if he paid the taxes for them, isn't that an additional gift - incurring yet additional gift taxes?

Anna
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CodyBugstein
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    He also may/could have avoided gift tax on a large chunk of that by exhausting his lifetime exemption. – Hart CO Dec 14 '17 at 19:49
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    "Hey buddy, lemme know how much tax you end up paying on that and I'll cut you another cheque for the difference" – Valorum Dec 14 '17 at 21:59
  • @Valorum possibly, but in the story it implies that Clooney has already paid the tax in advance – CodyBugstein Dec 14 '17 at 22:10
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    @CodyBugstein - Meh. He probably chucked in an extra $300k to cover those expenses. It doesn't sound like his old friends were massively well off or likely to have any kind of weird tax brackets that he needed to worry about. – Valorum Dec 14 '17 at 22:14
  • It seems to me that the last line of the quote is saying he paid the taxes on their income. – user2752467 Dec 14 '17 at 22:59
  • @user4556274 "The giver is responsible for any taxes on gifts" - is this true at the state level as well as the federal level? I'm especially thinking of a case where the gifter's state does not have a state gift tax but the recipient's state does - will the recipient's state go after one or the other? – davidbak Dec 15 '17 at 00:47
  • @Valorum: If he did that they'd still owe taxes on the difference... you need to do the math right! – user541686 Dec 15 '17 at 02:33
  • @Mehrdad - He played a financial guru in his last film. Maybe he got some free advice on set :-) – Valorum Dec 15 '17 at 07:24
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    @user4556274: While the headline might be that Clooney gifted the money, we can't exclude the possibility that it was donated indirectly - e.g. money for Clooney's international IP rights might have been channeled via a holding company outside the US. If this company made the donation instead, you'd have a complex tax situation. – MSalters Dec 15 '17 at 09:02

3 Answers3

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Clooney may have been confused or misquoted.

When he gives a friend a large gift, gift tax is owed. The giver pays this tax, not the recipient. Clooney would have been required to pay this tax. The gift is not considered income for the recipient, so it shouldn't impact their income taxes.

This is a little different then when, for example, Oprah gives all of her audience members a new car. In that case, the "gift" is considered a prize, which is a business expense for Oprah, but is considered income for the recipient, with income tax due. In that case, if Oprah wants the recipients to not have a tax burden, she needs to give additional cash to each recipient so that they can pay their taxes.

Ben Miller
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    Would that additional cash be part of the prize or a separate gift? – davidbak Dec 15 '17 at 00:45
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    @davidbak It would be part of the prize that would be considered income for the recipient. – Ben Miller Dec 15 '17 at 02:59
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    @davidbak I suppose if they intend the receiver to have $X after tax, and the tax is Y%, then they would actually give X/(1-Y/100) dollars as prize, so that when they pay the tax, they are left with X. – muru Dec 15 '17 at 06:28
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    Keep in mind that they would have to pay tax on the cash given to pay the tax and tax on the cash giving to pay the tax on the cash given to pay the tax.... https://en.wikipedia.org/wiki/Zeno%27s_paradoxes – Aaron Butacov Dec 15 '17 at 13:53
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    @AaronHarun: it's a converging series either way, no paradox :) – whatsisname Dec 15 '17 at 16:23
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    You can do it iteratively as a limit, or you can do the much simpler math of inversion as muru describes. – Harper - Reinstate Monica Dec 15 '17 at 17:01
  • The point of Oprah's strategy is that you have to distinguish between the prize as property (a car) and the prize as monetary value. If she didn't add cash to the prize, many of the recipients would have to sell the cars in order to pay the tax on the prize. So she gives enough cash on top so that they can pay the tax on the car and the extra cash, and still have the car. – Barmar Dec 15 '17 at 17:36
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    It's known as "grossing up for taxes" and can be done for many reasons. E.g., you get a reimbursement for moving costs from your employer, that's taxable (or may be under certain circumstances), so they "gross up" with extra cash beyond the actual moving expenses. (You don't get to see it in your wallet of course, because: taxes.) Of course, as your employer, they've got a good idea of your tax rate (between their pay and your W-4). – davidbak Dec 15 '17 at 18:10
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    It's now called "Oprah's paradox" instead of "Zeno's paradox". – Todd Wilcox Dec 15 '17 at 22:25
  • The car Oprah gave was not a gift. If it was a gift, it could not have been a business expense and it was, since it was given in the ordinary course of her business. George Clooney's gift to his friends was in fact a gift. It was not given in the course of his business and was given purely out of generosity. As such, he would have had to pay the taxes. Oprah got a deduction, George Clooney had to pay. – David Schwartz Dec 17 '17 at 09:26
  • @whatsisname Zeno's paradox isn't even a paradox since calculus made infinity less infinite. – Aaron Butacov Dec 18 '17 at 05:50
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"How is this possible? First of all, how did Clooney know everyone's tax rate, and second of all, if he paid the taxes for them, isn't that an additional gift - incurring yet additional [tyrannical] gift-taxes?"

As @BenMiller says, under US tax law it is the giver who has to pay gift taxes, not the recipient.

But even if that was not the case, if the writer meant that he paid someone's regular income taxes for the year, "how did Clooney know everyone's tax rate"? Well, he could ask them. That doesn't seem a difficult problem. "isn't that an additional gift?" Sometimes a business will offer a sale where they say "we'll pay you're sales tax". So if the regular price is, say, $100, and the sales tax is, let's suppose, 6%, normally you would have to pay $106: $100 to the seller and $6 for sales tax. But if they're going to claim that they're paying your sales tax, then that means the $100 has to be the sum of the sale price plus the sales tax, i.e. $100 must be 106% of the sale price. So do a little arithmetic, $100 / 1.06 = $94.34. 6% of $94.34 = $5.66, which makes a total of $100. I suppose with income taxes the math could get more complicated because giving more money could push the person into another tax bracket, but with sufficient mathematical manipulation -- or be lazy and make a guess and then adjust it by trial and error -- you could work out the right amount.

Jay
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  • Even if he also paid each friend additional money to pay for their taxes for that year, you still missed the point that gifted money is not considered income, and the receiver is not taxed for it. – Shorlan Dec 15 '17 at 00:17
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    I didn't realize it's the giver who pays tax (because of stories like the Oprah cars, etc). If that's the case though, why even bother to mention "he even paid the tax"? Of course he did (at least, of course he had to) – CodyBugstein Dec 15 '17 at 01:35
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    @CodyBugstein Most likely, the writer of the news article is themself confused about how gifting and taxes actually works. They are probably working under the simplified assumption that money you receive is income, so when the very likeable quote of Clooney even paying for taxes came up, it sounded good so they threw that in there with the rest of the article.

    In this case, it's about celebrity flashiness and it's not an article about gift/taxes, so they probably didn't care to look much in to the actual tax law being applied. All pretty reasonable assumptions.

     – Shorlan Dec 15 '17 at 03:52
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    @CodyBugstein Also, this is a classic "telephone game" situation. The Fortune article is relaying an MSNBC interview with Gerber, who is telling us what Clooney said in private years ago. – Ben Miller Dec 15 '17 at 12:26
  • @shorlan See my second paragraph. The third paragraph was a what-if, assuming that somehow the money was not legally considered a gift, or just hypothetically what if it wasn't. – Jay Dec 20 '17 at 14:03
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My take on this is that Clooney paid something extra to cover the taxes. Not an exact figure, which for most people would not be all that important. Each of his friends got a lot of money, which they, in the end, did not have to worry about. He might have even said something to them like: "I'll give you a million bucks. If the taxes eat into that, let me know and I'll make it up to you." but who looks that kind of gifthorse in the mouth?

T.E.D.
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