By Kenneth H. Bridges, CPA, PFS May 2018
Being a tax geek, as I watched the NFL Draft recently, I couldn’t help but think how those players selected by Florida-based teams (e.g. Minkah Fitzpatrick, selected by the Miami Dolphins) or the Texas-based Cowboys, Washington-based Seahawks, or Tennessee-based Titans were so much luckier (at least from an income tax perspective) than those selected by the DC, New York/New Jersey, Minnesota, Wisconsin and California teams (e.g. Mike McGlinchey, selected by the San Francisco 49ers). Not that anyone should feel sorry for any of these guys (e.g. McGlinchey’s 4-year contract is estimated at over $18 million, with over $11 million of that coming as a signing bonus), but Florida, Texas and Washington have no individual income tax (and Tennessee’s is limited to interest and dividends), whereas the individual rates for California, New York/New Jersey, DC, Minnesota and Wisconsin range from 7.65% in Wisconsin up to 13.3% in California. Other NFL states have individual rates which tend to range from 3% to 6%.
At the Federal level, successful athletes in the high profile sports will largely be subject to an income tax rate of 37%. You can add to that FICA and/or self-employment tax (15.3% combined employer/employee on the first $128,400, then essentially dropping to 3.8% thereafter), so figure that your high profile athletes in the U.S. are going to incur Federal taxes of around 40 cents per dollar of ordinary income. This is the case regardless of the state they reside in or play their sport in, and, if they are a U.S. citizen or resident, this tax will apply wherever they may be in the world.
An athlete’s state of residence will subject his or her worldwide income to its income tax, while permitting a credit or partial credit for taxes paid to other states. The credit permitted by the state of residence is limited to that state’s effective tax rate, so, for example, an athlete residing in Georgia (6% state rate) would typically only be able to claim a credit for about 1/2 of the tax paid to California (rates of up to 13.3%). Athletes residing in states with no individual income tax will typically incur state income tax only on income sourced to or apportioned to states with an income tax. There is a reason that a disproportionate number of professional golfers claim Florida as their home; and it is not just the ability to play golf in the winter.
For athletes in individual sports (e.g. golf and tennis), performance-based income is typically sourced to the state where the event occurs. For athletes in team sports (e.g. NFL, MLB, NBA and NHL), their team-paid compensation is typically apportioned amongst the states based on the ratio of duty days in the state to duty days everywhere, with “duty days” including not only games, but also practices, team meetings, and travel days. For athletes in sports where the total number of duty days is high relative to the number of games (e.g. the NFL), most of a player’s compensation will be apportioned to the state where his team is based; whereas for athletes in sports where the number of games is high relative to the total number of duty days (e.g. baseball), much of a player’s compensation may be subjected to the income tax of other states. In either case, however, it is clearly to the athlete’s advantage (from an income tax perspective) to play for a team based in a state with no income tax or a very low rate of income tax.
Even if an athlete plays for a team in a high-tax state, the athlete may benefit from claiming residency in a state without an income tax, since much of the athlete’s income may escape apportionment under the duty-days rule to the high-tax state where their team is based (e.g. income from endorsements or investments or duty day income apportioned to states without an income tax). On the other hand, the desire to be a part of the community where the athlete plays his or her sport may outweigh the incremental tax savings from residing elsewhere.
Signing bonuses, which can represent a substantial part of the compensation for a team sport athlete, may represent a special opportunity from a state tax minimization perspective. The rules of states which have specifically addressed this issue typically provide that signing bonuses are not subject to the duty day apportionment rule if: (1) the bonus is not conditioned upon the athlete playing any games, performing any subsequent services for the team, or even making the team; (2) the bonus is separate from the payment of salary and other compensation; and (3) it is nonrefundable. Accordingly, a signing bonus to an athlete resident in a state with no state income tax might escape state taxation, even if the athlete signs with a team based in a high-tax state.
For athletes who perform around the globe (e.g. golf, tennis and track), the tax situation becomes even more complicated, as they must look to the tax rules of not only their country(s) of citizenship and residence, but also to the countries where they compete, and the tax treaties (if any) between such countries and their country(s) of citizenship and residence.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.