Working your way up to professional athlete status is no simple feat—and it’s incredibly rewarding. Nothing speaks a thousand words like a six or seven-digit paycheck, even for just a few years. However, navigating the intricacies of “jock tax” can burst more than just a bubble—this is where tax strategies for professional athletes step in.
When non-resident athletes compete out-of-state, they pay “jock tax” to that region. Should their state of residence charge income taxes, jock tax is virtually inescapable. That is, save for a few states—like Florida—that don’t charge a state income tax. (If you’re playing in Miami, you might even consider relocating there!)
Understanding income tax can prove a bit of a nuisance. Let’s break it down. Athletes who are residents of a state that charges state income tax will settle this fee with their resident state. They must tax all earned income, whether obtained in-state or elsewhere.
On the other hand, non-resident athletes will only pay income tax on their in-state source income. If, for instance, you are a Florida resident (without in-state tax) and a member of the New England Patriots or Boston Red Sox, you’ll only pay taxes on your Massachusetts-earned income.
Two differing methods tax athlete income. These include:
A popular method of calculating a professional athlete’s in-state income, the duty days method will tax non-resident athletes for the days they spend in-state. What comprises duty days is the time spent in-state from the official preseason’s commencement to when the official season comes to an end.
Duty days refer to games and practice days, not necessarily counting days on injured reserves and inactive lists.
As a rule of thumb, athletes must include bonuses and other compensation for services in their total income. These might consist of endorsement or promotional income. Endorsement income is often only taxed within resident states. If residing in a no-income-tax state, these can make for exorbitant tax savings.
Athletes caught up in double-taxation can appeal to income-tax states to permit credit for non-resident states’ taxes.
To track duty days and business expenses (which, according to the 2018 Tax Cuts and Jobs Act [TCJA], may no longer be deductible), elite athletes might hire a personal assistant. However, lesser athletes must shoulder the burden of tracking duty days themselves—not an easy task when you hardly have time to enjoy an indulgent meal or some sightseeing.
Some players, depending on their team, will file taxes under a composite tax return method.
It’s highly unlikely for a professional athlete to sign on to a team depending on the related state income tax. However, taxes hardly go unnoticed—especially when they’re skyrocketing.
If you’re struggling to concoct a winning tax strategy for athletes and entertainers, give us a shout at Aaron Parthemer. As a group that has seen professional athleticism’s pitfalls and complications, we can help you thoroughly navigate income tax’s rocky waters.