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Did Alex Rodriguez play himself into a better tax situation?

Alex Rodriguez made headlines this past post season because of his ill-timed slump. However, the irony is: this slump may actually improve his financial situation by more than three million dollars.

Over the last three post seasons, Rodriguez hit only 10 singles and two doubles in his 75 official at bats for a .160 batting average. To make matters worse, this past post season he totaled just three singles and 12 strikeouts in 25 at bats. This slump and consequential benching added to the fact that he still has five years and 115 million dollars remaining on his contract have led to speculation that his days in NY may be numbered.

A native of Miami, Rodriguez has lived in Manhattan during the regular season for the past several years. So his income earned as a Yankee is subject to both NY state resident income tax (8.82 percent for individuals earning more than one million dollars) and New York City income tax (3.876 percent) for a total income tax rate of 12.7 percent. Plus, Rodriguez must also pay nonresident tax on income earned in the states and cities where he plays and earns income in during the season.

All athletes who perform services in the US face federal income tax exposure. State and city exposure depends on the state of residence and where the athlete plays during the season. So an athlete’s state income tax differs depending on his home state, the home state of his team and the nonresident income he earns traveling to other states and cities.

There are 30 Major League Baseball (MLB) teams who play in 17 states and 11 additional taxi jurisdictions. Of those, only athletes who play for the Toronto Blue Jays, based in Canada’s Ontario province (13.16 percent), and the San Francisco Giants, who must pay both CA and San Francisco tax (13 percent) have higher state income tax rates than Rodriguez right now.

If Rodriguez is traded this off season to any of the 28 other teams based in a state and city whose combined income tax rate is lower than his current rate, we can conclude that his tax liability will be much less than now. Best case scenario, Rodriguez is traded to one of the five teams located in the three states with no income tax. In that case, he would save more than 10 percent or three million dollars in the 2013 season alone.

To illustrate, let’s compare the projected state tax implications for Rodriguez as a New York Yankee to that of as a Miami Marlin.

For the 2013 MLB season, the Yankees and Rodriguez will play in 11 states. His resident and non-resident income tax rate will be 13.07 percent and his state tax liability will be $3,658,830.  We should note that although NY provides a tax credit for taxes paid to other jurisdictions, the credit is limited to NY’s income tax rate. Because NY’s rate is less than CA’s, it doesn’t completely eliminate the non-resident tax liability owed for the 11 games played in that state.

Compare this with the Marlins’ 2013 season schedule: the team will also play in 11 states with a potential nonresident state income tax rate of 1.99 percent for a liability of $556,151. Although Rodriguez would not be subject to any FL tax, he would have to pay nonresident state income tax for the 76 days spent outside FL. So in this scenario, despite exposure to nonresident state tax, Rodriguez’s state income tax savings for the 2013 season alone would be $3,102,679.

One final point: if Rodriguez should be traded to another team, that team would most likely require the Yankees to pay a percentage of his salary for the next five years.  If this should occur, this wouldn’t affect his tax liability though, because state tax liability is based on where the income is earned, not its source.


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