Recently on 60 minutes, President-Elect Donald Trump was asked about taking the $400,000 presidential salary while in the White House.
His answer? “Well, I’ve never commented on this, but the answer is no. I think I have to by law take $1, so I’ll take $1 a year.”
Mr. Trump has expressed numerous times on the campaign trail that he would not accept a presidential salary, saying, “The first thing I’m going to do is tell you that if I’m elected president, I’m accepting no salary, OK? That’s no big deal for me.”
While it is not certain what Mr. Trump’s annual salary range is (he never did release his tax returns), he is a wealthy individual. Forbes pegs his estimated net worth at $3.7 billion, putting him at #156 on the Forbes 400 (and #324 on the Billionaire’s list).
What we do know is that the President’s official salary is set by statute:
“The President shall receive in full for his services during the term for which he shall have been elected compensation in the aggregate amount of $400,000 a year, to be paid monthly, and in addition an expense allowance of $50,000 to assist in defraying expenses relating to or resulting from the discharge of his official duties. Any unused amount of such expense allowance shall revert to the Treasury pursuant to section 1552 of title 31, United States Code. No amount of such expense allowance shall be included in the gross income of the President. He shall be entitled also to the use of the furniture and other effects belonging to the United States and kept in the Executive Residence at the White House.”
The Vice President and members of Congress have salaries at $230,700 and $174,000, respectively, while the Speaker of the House makes a little more, at $223,500, and the House Majority & Minority Leaders get paid $193,400.
Since compensation is set by statute, Mr. Trump can’t actually refuse to take it – just like George Washington, who reportedly tried to refuse a salary but got paid anyway, at $25,000 per year.
That said, Mr. Trump could opt to donate his salary to charity or return it to the Treasury: he wouldn’t be the first President to do so. John F. Kennedy donated his presidential salary to charity, a practice he continued from his days serving in Congress. And Herbert Hoover, a self-made millionaire, also donated his salary to charity. In 2013, Barack Obama, who famously announced that he had just finished paying off his student loans a few years before he took office, agreed to return 5% of his salary to the Treasury after the government shutdown affected the pay of federal workers.
No matter the rate of pay, the President doesn’t get a pass when it comes to taxes: Presidents report and pay taxes just like everyone else. In fact, you can view a number of presidential federal income tax returns (including the last round of candidates for office, Mr. Trump being the exception) at the Tax Analysts Tax History Project.
But what happens when a taxpayer (the President included) declines to take a salary, or donates a salary to charity?
Under current tax law, money that you earn and subsequently donate to charity is typically taxed as income to you when earned; you can subsequently take the deduction on your Schedule A. That’s not as tax neutral as it sounds because of limitations on deductions and the fact that you have to itemize your deductions to take advantage of the charitable deduction. Depending on your individual tax circumstances, including the income before the deduction could also knock you into the alternative minimum tax (AMT) system, subject you to income-based phaseouts, or cause problems with self-employment tax and estimated payments.
There are some very specific exceptions to this rule. One is pretty high profile: the Internal Revenue Service (IRS) allows you to exempt income from Pulitzer, Nobel, and similar prizes if the prize is transferred by the payer directly to a governmental unit or tax-exempt charitable organization (other rules apply). Even if you direct your salary to charity and the check is cut directly from your employer to the charitable organization, it’s still taxed to you, and the tax consequences of the donation follow.
But what if – instead of taking the cash and donating it to charity – you decide you don’t want the money? In most instances, it’s still income to you. In the tax world, there’s a concept known as “constructive receipt” which deems a taxpayer responsible for reporting income when it’s made available, and not simply when the taxpayer chooses to take the money. Here’s the rule:
“Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.”
In other words, there’s no requirement that you take the money to make it taxable – just that it’s made available to you. If there’s a penalty for taking it (think deferred income in a retirement account) or if you don’t have the legal right to take it (think stock options that are not yet vested), the IRS doesn’t consider it fully available to you and there’s no tax immediately payable.
But what if you leave your paycheck in a drawer, tear it up, or refuse to cash it? Or what if you hand it back to HR? For tax reasons, you can’t just give your check back or refuse to take it in order to escape or defer tax: it’s still taxable to you when it’s made available. Giving it back or refusing to cash it doesn’t change the fact that you had the opportunity to take it – even if you declined.
To get around this problem in the private sector, some high-level executives have their pay fixed at a lower rate. The salary for Mark Zuckerberg? He gets paid $1 per year for his work as CEO of Facebook. That mirrors the compensation Steve Jobs drew when he served as CEO of Apple. Other high ranking CEOs have also, at times, accepted compensation packages which paid out just $1 in salary including Tesla’s Elon Musk and Yelp’s Jeremy Stoppelman. The bulk of their compensation is generally in the form of deferred compensation, stock, and stock options.
However, refusing part of a salary – including a year-end bonus or permanent raise – is an issue that arises from time to time. Taxpayers who aren’t in the position to forego millions of dollars can still shield portions of their salary from tax. That’s because an increase in compensation doesn’t always have to result in a bigger paycheck. You can effectively “refuse” a bigger salary on your own by directing more dollars into tax-deferred retirement accounts, getting paid in tax-deferred stock or stock options, or simply taking more vacation (something many Americans don’t do).
If you find yourself in a position where you might want to decline or defer additional salary or benefits, consult with your tax professional – but do it before you make a decision. It’s difficult, for federal income tax reasons, to make adjustments (or arguments) on pay and constructive receipt retroactively.
