W-2s are arriving in mailboxes across the country, and tax preparation advertisements are flooding the airwaves. As many of us turn to local preparers or self-service software programs, athletes are contacting their accountants and hiring tax firms specializing in the tangled world of taxes for sports professionals.
Tax burdens can be heavy for athletes, especially with their poor cash management track records. The state of Wisconsin publishes a list of the top 100 tax offenders, and two former NBA players have featured prominently this year. Latrell Sprewell, a Wisconsin native, was named the top offender last summer with more than $3.5 million in back taxes owed. Sprewell has since been removed from the list, but that only elevated former Bucks player Anthony Mason to the No. 2 spot, owing the state about $2 million.
Taxes on residents can have a real effect on what team an athlete chooses in free agency. Teams in states like Florida, Texas and Washington have huge advantages because they don’t have personal income taxes. Compare the Mariners and Yankees. Washington has no personal income tax, but playing games in New York City will cost almost 8 percent in total state and local taxes. This makes the same size contract completely different from an income standpoint to the athlete. It’s no wonder that the Yankees often pay exorbitantly more in free agency.
In bidding for a $100 million contract against the Mariners, the Yankees might have to tack on an extra $8 million just to offset the tax liability for NYC. Athletes can try to reduce this liability by living elsewhere, but they are public targets of compliance departments. The state and city of New York famously sued Derek Jeter, who claimed to be a resident of Florida, where he paid no personal income tax. The courts disagreed, and Jeter settled out of court, cutting a check for back taxes from his Trump Tower apartment. This makes Cliff Lee’s signing with the Phillies even more interesting, when you consider he could have signed with the Texas Rangers and avoid Pennsylvania and Philadelphia taxes.
Outside of the amount residents owe, states also take in huge sums from nonresident athletes through the “jock tax.” Eighteen states are known to have these taxes and each one of them is free to design it independently.
Generally, jock taxes allow states to collect on the portion of the athlete’s salary that is earned in that state, usually based on the amount of time within its borders. It’s no small amount, as California took in $102 million in 2006-07. Tennessee’s tax is a flat $2,500 per contest, up to $7,500 per year. Former Detroit Red Wing Brian Rafalski once claimed that 17 of his teammates would actually pay a greater tax than they would make for the games played at the Nashville Predators. The jock tax sometimes also applies to other highly paid public figures, like entertainers.
The jock tax supposedly started in 1991, when the Chicago Bulls and Michael Jordan beat the LA Lakers to win their first NBA championship. Because the Bulls played two games of the finals in California, the state decided he was liable for two days’ worth of tax on the amount he was making for winning the championship. After California sent a tax bill to Jordan, the state of Illinois retaliated by taxing athletes from any state that itself taxed athletes (which was only California at the time). From there, other states saw the advantages of the jock tax. No athlete subject to the nonresident tax can protest it because, as nonresidents, they can’t vote in the state. State tax agencies easily can track and enforce liability, because athlete salaries and schedules are easily accessible.
Maybe Dwight Howard should think twice about how much it will cost him personally to be traded from Orlando to a big-city team. Next time you hear about a free agent weighing offers from teams, keep in mind where they are located in addition to their championship chances.
Bill Sayer is a financial analyst in the insurance industry and holds a degree in economics. A native of Upstate New York, Bill enjoys watching college football, the NFL, NHL and Premier League soccer from his home in Palmyra. Have a suggestion, link or question?