The answer seems easy enough. If President Obama follows the examples set by most Nobel Prize recipients, he'll donate all or most of the prize money to qualified not-for-profit organizations. Still, shortly after acknowledging the honor, when the crowd asked what he planned to do with the money, there was no answer. You have to admit, this is a big decision.
Chairman of the Nobel Peace Prize committee, Thorbjoern Jagland, said the prize was not just a reward for Obama, but a way of "enhancing" his future efforts to promote peace... a sort of inducement. "Only very rarely has a person to the same extent as Obama captured the world's attention and given its people hope for a better future. In the past year Obama has been a key person for important initiatives in the U.N. for nuclear disarmament, and to set a completely new agenda for the Muslim world and East-West relations."
Based on that statement and Obama's own stated priorities, one could speculate that the president might donate the funds to organizations dedicated to our nuclear disarmament and to agencies that act to make Muslims more mainstream in our country.
Here's a look at what other recipients have done.
Both Jimmy Carter and Al Gore took advantage of a subsection of the Tax Code that allows prize winners, under certain circumstances, to funnel the money directly to their chosen charities, rather than receiving the money into their own taxable incomes.
Here's the general rule from the Tax Code:
Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.
(b) Exception for certain prizes and awards transferred to charities
Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if--
(1) the recipient was selected without any action on his part to enter the contest or proceeding;
(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and
(3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170 (c) pursuant to a designation made by the recipient.
With this in mind, when Al Gore won the prize (then $1.8 million) in 2007, he and his wife transferred it directly to the Alliance for Climate Change, which is touted as a bipartisan not-for-profit organization "devoted to changing public opinion in the U.S. and around the world about the urgency of solving the climate crisis." By making the donation in that way, the money did not become part of Gore's taxable income and he forfeited any charitable deduction.
In 2002 Jimmy Carter won the peace prize and also bypassed his taxable income by funneling the money directly into two not-for-profits, the Carter Center in Atlanta, Georgia and the Rosalyn Carter Institute for Caregiving, at Georgia Southwestern University.
Martin Luther King Jr. donated his prize to the civil rights movement.
Stepping back much farther in history, the first sitting president to receive the prize was Theodore Roosevelt. He waited until he was out of office to travel to Europe to receive the prize. He planned to start a foundation of his own which would receive the money. Instead, he eventually distributed the funds to 28 separate charitable organizations, and also gave some to "worthy friends" who were involved in volunteer pursuits.
Woodrow Wilson was the second sitting president to earn the award (Obama is the third). One author said of Wilson that he "behaved rather ignobly over the monetary award", presumably because he did not donate the money. Instead, worried about his own post-presidential financial security, he deposited the money in a Swedish bank. That may have drawn criticism from many quarters then as it would now. But if donating the money is dictated by political pressure, then the donation itself has nothing to do with charitable inclinations and is not necessarily praiseworthy. In spite of the criticism, Wilson was well within his rights to decline to donate the money.
What path will Obama take? No doubt he will donate the money, but how and to whom? Some experts say that receiving the prize will do him more harm than good, politically. Polls taken soon after the announcement show that the majority of respondents regardless of political party thought the award was premature.
Will Obama bypass his taxable income and funnel the money directly into suitable charities?
Ellen Aprill, Professor of Law and John E. Anderson Chair in Tax law at Loyola Law School Los Angeles thinks this will be a dilemma for Obama, whichever way he goes. In fact, winning the prize may do him more political harm than good.
She points out that in 2008, his adjusted gross income was nearly $2.7 million, mostly from sales of his two books. Since the monetary prize will be available to him in December of this year, if he doesn't take the bypass, the money will become part of his 2009 income. Assuming his 2009 income is comparable to 2008, he should have no trouble donating all or most of the prize without bumping his head on the 50% AGI limits on charitable deductions.
Some experts say it would be politically expedient for Obama to take the money into his taxable income and then show the charitable contributions on his tax return--since generally, the tax returns of a sitting president are disclosed for public viewing. That would support his policy of spreading the wealth around. Aprill disagrees. She thinks that using the prize money to reduce his taxable income would give him the appearance of trying to shelter income by excluding it. According to her, limiting his taxable income in this way would be "too great a public relations detriment" to him. She goes on to say how ironic it is that because of public disclosure and in the interest of public relations, Obama may have to forego using legitimate, beneficial tax provisions.
Interestingly, if the award were given in 2011, under the president's proposed cap on charitable contribution deductions for the wealthy, he would get a much smaller tax benefit from the contribution than he will under current law.
Which way will he go? The next few months will provide the answer. Either way, it will be interesting to see which causes he endorses in the form of donations and how they line up with the sentiments of the Nobel Peace Prize committee.