Ed note: Warning: what follows is not for the faint of heart. But, if you love talking taxes or frequent the Wookieepedia boards, then you are in for a treat.
Enthusiasm for Star Wars has spiked recently with the release of the much-anticipated trailer to the next chapter in the series, The Force Awakens. Both that film, which is scheduled to come out later this year, and 2016’s Rogue One will offer a welcome return to the universe of Wookiees, Protocol Droids, Lightsabers, etc. 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 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, I wanted to explore some of the potential tax issues that have come up during the course of this saga.
Though these events all took place a long time ago in a galaxy far, far away, I will use our modern (2015) U.S. rules and tax system, which applies in the same manner to all sentient alien species, including Humans, Rodians, 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 to the government attempting to destroy them. For those of you who still have not seen the prior six films, there are spoilers ahead.
1. Is Darth Vader’s outfit a deductible business expense?
Darth Vader casts an intimidating presence wherever he appears, due in no small part to his distinctive outfit. Since his outfit is so essential to the work that he performs, he may want to claim a business deduction.
In order to claim a business deduction for clothing, the employee’s occupation must require him to purchase the special attire as a condition of employment and the special apparel cannot be worn or used as ordinary clothing. He cannot claim the deduction if the Empire (aka: the employer) pays for the costs of the uniform on his behalf. Vader’s attire probably meets the second requirement, since it seems rather impractical for use outside of an Imperial setting, but I doubt all Sith Lords employed by the Empire must dress in this manner. After all, very few among us can effectively wear a cape.
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, if Vader already chose to take a medical expense deduction for his suit, he cannot also claim the costs as a business expense even if it did qualify.
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, in his line of work loss of limb is an ongoing concern.
3. Can C-3PO and R2-D2 be claimed as dependents?
This droid odd couple has been there for most of the important moments during both trilogies. However, under the current Internal Revenue Code, a dependency exemption can only be taken with respect to an “individual.” While there is limited precedent on the issue, it seems unlikely that this term would include droids, regardless of their ability to either shut down garbage mashers or become a deity in the eyes of small forest-dwelling mammals. Therefore, none of Anakin, Captain Antilles, Obi-Wan or Luke will be able to include these two as exemptions on their returns.
4. Could Han Solo have claimed any deductible expenses during his completion of the Kessel Run in less than 12 Parsecs?
Han never says what he was doing during this Kessel Run, but it seems likely to involve smuggling. 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 usually 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 travelling 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 the Millennium Falcon, since it is not an automobile. Probably for the best, since a claimed transportation expense deduction of a little over $132 trillion just might generate an IRS audit. The crew of the Falcon should instead go ahead and keep good expense records.
5. Does 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.
6. 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). This loss certainly qualifies as a casualty, which is defined as the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. In most cases, the amount of any casualty loss will be the difference between the pre-event and post-event fair market value, reduced by any insurance or other type of recovery related to the event. If there is any prospect of recovery (from insurance or otherwise), the deduction should not be taken until no reasonable expectation of recovery exists. If the amount of the recovery exceeds the change in fair market value, it is also possible to have a casualty gain.
The loss recovery rules are also different depending on how the destroyed property was used. Jabba’s barge was most likely used partly for business and partly for personal purposes. In these cases, the casualty or theft loss deduction must be figured separately for the personal use portion and for the business or income-producing portion because personal and business losses are calculated differently from one another.
6a. 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 wealthiest. 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 $5.43 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 the Hutt Palace, and may delay the acquisition of a replacement Rancor.
7. 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 akin to a primary school or secondary school for a large portion of the attendees. 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.
8. What does Admiral Ackbar say when he files his return?
“IT’S A TAX!!!”
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