If you’re lucky enough to be paid to play a sport professionally, that’s a dream come true for some folks. But the tax issues that unfortunately arise with being a professional athlete can be a nightmare, especially when it comes to State and Local tax filings.
Being on the road for a majority of the year is part of the job for a professional athlete. Travelling from state to state, city to city and for some, country to country can be very exciting, but overwhelming and tiring in the same time. You’re away from family and friends, living out of a suitcase, dealing with airports/jet-lag and even worse… each one of those states travelled to may require you to file a tax return for their state. Each state taxes you at their income tax rate for every day that you’re playing (aka “working”) in their state. That same income earned for playing is also taxed by the athletes resident home state. But don’t worry, states aren’t that greedy! At first glance, you might think you’re “double taxed” on the same income earned, but that’s not the case here. To avoid double taxation, tax credits exist. The athlete can take a tax credit on their resident state’s tax return for the taxes they paid to the other states they played in during that year. However, there is no credit for athletes that live in a state that doesn’t tax income such as Florida and Texas. In other words, they can offset the taxes they pay to their resident home state with the amount of taxes they paid to the other states. Don’t try to get too clever with the credit, though; there are limits to ensure that you can’t reduce your overall tax burden/tax rate.
For example, Carmelo Anthony is a New York City resident. He will pay a combined New York state and New York City tax rate of 12.69% on his earnings playing professional basketball for the New York Knicks. With his current contract worth $124 million, that’s over $15.7 million in NY/NYC taxes he will pay over the life of his contract assuming he continues to live in New York City. When the team travels to Boston to play the Celtics, he would be subject to a Massachusetts income tax rate of 5.15% for every “duty day” he’s playing in the city of Boston. When filing his resident New York tax return for that year, he would receive a tax credit for the amount he paid to Massachusetts to avoid the “double taxation”.
Duty Days: AKA “The Jock Tax”
As previously mentioned in the Carmelo Anthony example, he is taxed for every “duty day” he played in the city of Boston at the Massachusetts income tax rate of 5.15%. The majority of states and cities assess “The Jock Tax” by calculating “duty days”, which is the number of work days spent in that particular state. Work days include not only the day that the game is played but also the practice days when games are not played. That total is then divided by the number of work days in a season, usually includes preseason games as well.
Tax Saving Ideas
Athletes seem to be more financially savvy these days and are aware of the so-called “Jock Tax”. More and more athletes are signing with teams that are located in states that don’t tax income, like the Miami Heat, the Houston Rockets and San Antonio Spurs. For example – Back in 2010, Lebron James made the “decision” to take his talents down to South Beach after playing his entire career in Cleveland. Another example, Dwight Howard signed with the Houston Rockets in 2013 after playing with the Los Angeles Lakers for one year and paying a California state tax rate of 13.3%. Most recently, LaMarcus Aldridge left the Portland Trailblazers and their 9.9% income tax rate to sign with the San Antonio Spurs and their zero state tax, Texas. Now, I’m not saying that saving state taxes was 100% the reason why they all made the decision to move to those non-taxing states, but I’m sure it factored into their decision considering their contracts were in the eight-figure range, and that would add up to a few million dollars of tax savings.
State taxes are an especially complicated issue for athletes. If you have any questions, please feel free to reach out to a member of Withum’s Sports and Entertainment group.