The Jock Tax: Super Tax for Athletes?
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What Is The Jock Tax?
We all know that professional athletes make a ton of money, especially in this new age of inflated licensing deals, skyrocketing salary caps and high-profile brand deals. So it makes sense that professional athletes command the spotlight both on and off the field, but few are aware of the intricate financial planning that goes on behind the scenes, particularly concerning the wild world of state taxes.
Enter the 'jock tax,' a term frequently associated with the tax bill NBA players, NFL players, MLB players, and other American sports stars face when they play games in different states. Note that this is a uniquely American phenomenon, as athletes in other countries pay the tax levied by that country. In the good old US of A, we have individual states, which means individual rules, which means unheralded financial complexity. Let's dive in.
Understanding the Jock Tax
For many, the term 'jock taxes' became public knowledge in 1991. Why? Like most things in American sports history, it comes back to Michael Jordan.
Remember the 1991 NBA Finals between the Chicago Bulls and the Los Angeles Lakers? If you're tech savvy enough to find this site, chances are that you don't, so let me fill you in. 1991 saw the true emergence of MJ, with Jordan winning his first NBA title and effectively ending the Showtime Lakers (RIP "Winning Time," by the way). And just like on the court, Jordan changed the game off the court, too.
During the Bulls' victory parade in the streets of Chicago, Jordan's accountant got a letter in the mail from city of Los Angeles, stating that Jordan owed them $10,000 in taxes for the games he played in the city, resurrecting a bygone part of the California tax code as revenge for beating the Lakers. Shortly after, Illinois's state government got involved and implemented a similar tax on visiting athletes, nicknaming the bill "Jordan's Revenge." Just like that, the complexities of the jock tax were introduced into American sports.
In its simplest terms, the jock tax targets nonresident professional athletes and levies state income taxes based on the number of games or "duty days" they play or work in a particular state. For example, if an NBA player from the New York team plays a championship game in California, despite his home state being New York, he will owe California state taxes on the income earned during that game.
Calculating the Jock Tax: The Duty Days Method
Calculating the jock tax involves considering the total number of days an athlete works (duty days) and the number of those days spent in a particular state. An NBA player might have a game day against the Miami Heat, a team meeting the next day, and a few practice days before the first day of their next match in a different state.
Endorsement income, base salary from the professional sports team, and bonuses like Super Bowl earnings or playoff game rewards can all be part of an athlete's taxable income. With public schedules available for most professional teams, state governments have an easy target to determine and collect tax revenue. For example, here is a breakdown from Bloomberg Tax (by way of Joe Pompliano) that looks at Golden State Warriors star Steph Curry's jock tax breakdown, which includes a stark reminder of Canadian tax rates:
However, tax planning isn't straightforward. Cities like Pittsburgh or Cleveland also levy taxes on nonresident athletes, making the tax situation even more intricate. Given the tax implications, athletes like LeBron James or the aforementioned Curry often consult with certified public accountants and tax professionals. These advisors assess not just state but federal taxes, ensuring their clients don't step into the highest tax bracket unknowingly.
Controversies and Legal Battles
This system has led to numerous disputes. The Ohio Supreme Court, for example, had a case involving Jeff Saturday, the former Indianapolis Colts player, sports talk analyst and inexplicable head coach. He was taxed by the city of Cleveland for a game he didn't play, though his case eventually reached the Ohio Supreme Court. The case highlighted the tax consequences many nonresident athletes face, even if their involvement in a game is minimal or nonexistent.
The Extent of Jock Taxes
Not all states in the United States have jumped on the jock tax bandwagon. While major states like California and New York are quick to send tax returns to nonresident athletes, only a handful of states, including states like Kansas City and the District of Columbia, resist the allure of this tax revenue. This can also be a factor in free agency and trade decisions when a player is choosing a new team. For example, former Boston Celtic Grant Williams chose to go to the Dallas Mavericks due to the difference in taxes, resulting in an effective pay raise.
However, states with professional sports teams, such as the New England Patriots or the Atlanta Falcons, often have tax codes in place to tax visiting teams. Foreign athletes aren’t exempt either. In the U.S., a central withholding agreement can be applied to foreign athletes, ensuring they pay their due.
Tools and Financial Planning
Given the complexities, athletes often rely heavily on financial planning from seasoned tax advisors to navigate their tax landscape. While the state of residence might offer tax cuts, playing away games, attending team meetings, or even engaging team trainers and equipment managers in another state could all have tax consequences.
Moreover, the tax rate varies by state, and with athletes playing in numerous states throughout the year, it can be a massive undertaking to ensure they don't overpay or underpay their due. Tax professionals, understanding the nuances of the tax law and the usual round of state taxes, become indispensable.
While the concept of the jock tax might seem like an easy way for states to get a substantial amount of tax from wealthy athletes, it raises important questions about the fairness of taxing nonresidents. After all, the athletes aren’t just playing; they're also boosting local economies, from ticket sales to merchandise.
Yet, as long as we have professional teams competing across different states, the jock tax will remain a significant, if not contentious, part of an athlete's financial landscape. As the saying goes, there are two certainties in life: death and taxes. For the stars of the NBA, NFL, and other sports, that includes the jock tax, a unique intersection of sports, fame, and state revenue ambitions.