Tax Considerations for Professional Athletes in the U.S.

written on behalf of Feigenbaum Law

Professional sports are a multi-billion-dollar industry, propelled by major leagues including the NFL, NBA, MLB, MLS, among others, and made popular by players earning millions of dollars a year. It is also an area of tax complexity for athletes for a wide range of reasons. What are the biggest areas of concern for players in the U.S.?

The Tax Cuts and Jobs Act

We’ve previously blogged about the Trump administration’s Tax Cuts and Jobs Act. Now, as Americans enter tax season, the full impact of the recent legislative changes is now being felt, particularly on high-income earners such as athletes.

A big impact of the recent tax reform comes from the fact that taxpayers can no longer:

• Deduct more than $10,000 for state and local taxes (i.e. SALT). In addition to affecting high-income earners, such as athletes, this controversial change was also the subject of a recent lawsuit filed against the federal government by a number of Democratic states;
• Declare certain itemized deductions for work-related expenses (in the case of athletes, things such as agent fees, workout apparel, mobile phone(s), meals/entertainment);
• Declare certain itemized deductions for investment fees.

This can all add up to a significant amount, especially where these expenses and fees are substantial, as is generally the case with professional athletes.

The “Jock” Tax

The so-called “jock tax” was something that existed even before the recent tax changes.

It came into popular lexicon in the early 1990’s with a now infamous episode. Soon after Jordan’s 1991 championship debut and the Chicago Bulls’ victory over the L.A. Lakers in the finals, the State of California informed Jordan that he would have to pay taxes on the income earned on the days the Bulls spent playing in L.A.

In response to this demand, the State of Illinois passed a law, known as “Michael Jordan’s Revenge”, which imposed state taxes on athletes from any other state, like California, who levied a state tax on their residents. A number of other state and city governments did the same.

Fast forward to present day, and almost every jurisdiction (both state and city) with a professional sports team has enacted its own “Jock Tax” policy. This Jock Tax basically means that an athlete will pay different amounts of tax in different states, depending on where they travel for away games and how much the state tax is in the areas where those games take place.

For example, if an athlete lives in a state where there is no income tax he or she would pay no income tax on income earned during home pages. However, if that athlete travels to a state where there is income tax for an away game, he or she would pay the state tax rate on the amount earned for that game.

States that currently have no state tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee cannot charge tax on income, but do charge tax on dividend income and interest. Washington D.C. cannot charge income tax to non-residents.

Mitigating Tax Impact

Some athletes try and mitigate the impact of the Jock Tax by trying to join a team in a no state tax state, so they can avoid taxes on home games and endorsement earnings. Other players choose to live in a no state tax state, even if they play for a team in a different state. If a player chooses to live in a different state than where the team they play for is based, that athlete must prove that he or she was in his or her “domicile” state for at least 183 days in a given year. This can be a challenge, particularly for an athlete that travels often.

Another way to mitigate the impact of taxes is to set up a corporation in order to take advantage of corporate tax rates, particularly the new lower corporate rate. This could be helpful for athletes with significant earnings from endorsements, in addition to income earned from playing.

How Can Feigenbaum Law Help?

At Feigenbaum Law, our highly skilled team provides a range of cross-border tax services to top athletes and entertainers in Canada and the United States. Our experience and extensive knowledge of both countries’ tax systems have made us trusted advisors to producers, writers, musicians, actors, directors, professional athletes, as well as  agents, coaches, and managers who routinely come to us for assistance with their tax and legal work. Our knowledge of jurisdictional laws and regulations can help lower your overall tax risk and yield sizable tax benefits.

Contact us to learn more about how we can help or call us at (416) 777-8433 or toll free at (877) 275-4792.