Star Wars: The tax return of the Jedi
With the premiere of another chapter in the story, The Tax Institute explores some potential tax issues from the “Star Wars” universe.
With the premiere of another Star Wars story, what better way to celebrate than retreating into the films and shows; back into to the universe of Wookiees, protocol droids, lightsabers, and “the force.” We may love watching this drama unfold, but there are still more practical matters to consider in the “Star Wars” universe. After all, someone has to pay for all of these secret snow planet bases, secret lava planet bases, secret red salt planet bases, and all other manner of secret bases.
At the risk of making the greatest space opera in history about as exciting as a discussion of trade embargoes in the Galactic Senate, to honor this national holiday, this article explores some potential tax issues from the “Star Wars” universe.
Though these events all took place a long time ago in a galaxy far, far away, the U.S. rules and tax system are discussed here, which applies in the same manner to all sentient alien species, including Humans, Rodians, Twileks, Gungans, and the rest of the inhabitants of the “Star Wars” universe. Also, it will be necessary to suspend disbelief for a moment and assume that members of the Jedi Order and the Rebel Alliance will pay taxes, even if the government wants to destroy them. For those of you who still have not seen the films, the two other “Star Wars” stories, or numerous television series, there are spoilers ahead.
1. Are Darth Vader’s or Kylo Ren’s outfits deductible?
Darth Vader and Kylo Ren cast an intimidating presence wherever they appear, due in no small part to their distinctive outfits. Since this garb is so essential to the work that they perform, they may want to claim a business deduction. However, under current tax rules, they cannot claim a business expense. As employees of the Empire and the First Order, respectively, Vader and Ren cannot deduct their masks, capes, or any other part of their ensemble. On the other hand, if their employers choose to pay the costs for these suits using an accountable plan, then those costs are not taxed to either Sith leader and the employer can claim a deduction for those expenses.
An additional wrinkle comes up with Vader’s suit in that it also serves a necessary medical function. The Emperor constructed this suit following Anakin’s fight with Obi-Wan on Mustafar, and without it he probably cannot survive. Therefore, although he cannot claim a business expense, he can deduct the annual suit maintenance costs if he itemizes.
2. Is Luke’s replacement hand a deductible medical expense?
Yes, artificial limbs such as Luke’s new right hand are a qualified medical expense. This deduction can include both the costs paid to install the new appendage, as well as any ongoing maintenance costs; a small solace that Luke can take away from an otherwise lousy trip to Cloud City. He can also take an itemized deduction for any ongoing medical insurance premiums he must pay out-of-pocket. As his father can attest, there is always potential for further loss of limb as a Jedi or a Sith.
3. Can C-3PO, R2-D2, K-2SO, or other droids be claimed as dependents?
Droid companions have been there for most of the important moments during all three trilogies as well as in “Rogue One” and “Solo.” However, under the current Internal Revenue Code, dependents include only “individuals.” While there are not a lot of prior cases where it’s come up, it seems unlikely that this term would include droids, regardless of their ability to shut down garbage mashers, become a deity in the eyes of small forest-dwelling mammals, or incite droid revolutions on mining planets.
4. Can “Baby Yoda” be claimed as a dependent?
Unlike the droids, “Baby Yoda” can be a dependent for anyone who meets all the tests to claim him. He’s too old to be a “qualifying child” for anyone (despite his youthful appearance), but he can be a “qualifying relative.” If Baby Yoda lives with the Mandalorian for the entire year, does not provide his own support, does not receive gross income, and is not married, then the Mandalorian may be able to claim him. (Dependents also usually must be U.S. citizens, resident aliens, or residents of Canada or Mexico, but applying this test kind of ruins the fun of this whole exercise.) Claiming Baby Yoda might give the Mandalorian a $500 credit on his return.
Of course, before anyone can include him on their return, we’ll have to find out his real name.
5. Could Han Solo have claimed any deductible expenses during his completion of the Kessel Run in less than 12 parsecs?
As we saw in “Solo,” Han took great risks to complete this treacherous route. It cemented his status as a renowned smuggler. Most smugglers in both our universe and the “Star Wars” universe do not report proceeds from smuggling, but the normal income tax rules do require such reporting. If Han and Chewie are reporting smuggling income, then they can report related expenses as well. However, such deductible costs would not include any bribes paid to customs agents or similar illegal kickbacks. Some examples of expenses that can be deducted include the actual costs of transportation, meals and lodging expenses while traveling away from home, and certain entertainment expenses if ordinary and necessary in the course of the business.
Automobiles are eligible to use a standard mileage rate for business travel of 57.5 cents per mile. However, this standard rate would not be available to non-automobiles like the Millennium Falcon. Probably for the best, since a claimed transportation expense deduction of $132 trillion just might generate an IRS audit. The crew of the Falcon should instead go ahead and keep good expense records.
6. Does (not Baby) Yoda have a retirement plan?
Judging by the state of his Dagobah home, my guess is he does not. Even if he did want to plan for his post-Jedi life, his options for retirement planning would have been somewhat limited by the time we meet him. For example, Yoda could not set up his own traditional IRA, since he was well past the maximum age limit for setting up such a plan (age 70½). Put another way, when 900 years old you reach, limited your tax deferral options will be.
7. Can the Hutts claim a deduction for their destroyed sail barge?
In the process of avoiding execution by Sarlaac, Luke, Chewbacca, Han, Lando and Leia destroy Jabba’s sail barge, leaving the remaining Hutts to pick up the pieces (both literally and figuratively). Prior to 2018, this destruction would at least allow the remaining Hutts to claim a casualty loss. However, for 2018-2025 deductible personal casualty losses include only those sustained as a result of a federally-declared disaster, so the Hutts are probably out of luck. There are some planetary-wide explosions elsewhere throughout the series that might qualify.
The Hutt heirs may be able to claim a casualty loss deduction if the barge is business-use property rather than personal-use. Such a loss would be figured based on the greater of the barge’s adjusted basis before it was destroyed or the decrease in its fair market value as a result of the casualty. This loss would also be reduced by any insurance or other reimbursement payments the Hutts received.
8. Are estate taxes owed as the result of Jabba’s death?
Jabba was blown up right along with the rest of his barge, although by that time he had already been killed by Leia. In any case, at the time of his death it is likely that he was one of the wealthiest aliens on Tatooine, if not the whole galaxy. The estates of some deceased individuals will need to pay estate taxes where the fair market value of the assets owned at death exceeds a certain amount. The gross estate for estate tax purposes can include, among other things, real property, capital assets, ongoing business interests and cash owned by a decedent at the date of death.
The value of Jabba’s personal estate probably exceeds the top exclusion amount in effect, which is currently $11.58 million. Therefore, his estate will likely need to pay taxes on the excess over this exclusion amount at the top tax rate of 40%. This kind of tax bill could cause a little belt-tightening around Hutt Palace and may delay the acquisition of a replacement Rancor.
9. Can the parents of aspiring Jedi claim a tax credit for sending their children to the Jedi Academy?
While it is not specified during the course of the prequels, the Jedi Academy probably would not be considered an eligible postsecondary educational institution for the purposes of the American Opportunity Credit or the Lifetime Learning Credit. The age of the padawans suggests that the Academy is more similar to a primary school or secondary school. However, the Academy can offer tax-free scholarships to its students, and these parents can choose to set up a Coverdell ESA and use distributions to pay these expenses. Also, proud parents can pay tuition using tax-free distributions from their 529 plans.
10. What does Admiral Ackbar say when he files his return?
Looking for more space + tax content? Check out the Insights article, "Tax: The Final Frontier? Foreign earned income exclusion and space travel"