... tax experts contend there's no such thing as a free spaceflight. Some contest sponsors provide a check to cover taxes, but that income is also taxable.
Iterate to convergence, folks.
Do tax experts also claim that this doesn't work? The only issue I can see is that to compute the total amount needed, you must know the rest of that person's adjusted gross income for the year (so you can compute their tax rate at each step of iteration).
I believe I've often read about corporations paying the taxes on perks they give to their senior executives. I always just assumed they iterated.
Followup: Confirmed in at least one scenario. I did a little poking around with Google. In the case of a life insurance perk, there is something called a Section 162 Double Bonus Plan. Here the company pays not only the premium and employee's tax on that benefit, but also the tax on the tax. Is this process really iterated further? Yes, judging by the $166,667 example in
this article (since 1 + 0.4 + 0.4^2 + 0.4^3 +
... = 1.66667):
What are the alternatives? The so-called 162 Double Bonus Plan is one. The company agrees to make an annual bonus of the after-tax amount necessary to pay the premium on an executive-owned life insurance policy. The company also makes a "double bonus" to cover the taxes the employee must pay on the bonus(es). Because the participant is paying taxes on the bonuses, the regulations otherwise applicable to traditional NQDC (and, in particular, the Act) are irrelevant. However, since the employer is expected to "gross up" the bonus to cover taxes, this concept is expensive and tax-inefficient. Assuming a 40% marginal tax rate, the gross cost to a Company is $166,667 to yield an after-tax bonus to the employee of $100,000.
