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Here Today Gone Tomorrow

How deferred compensation in athletes’ contracts has California scrambling to stop this money from escaping taxation within that state.

In December of 2023, The Los Angeles Dodgers, signed two-way superstar Shohei Ohtani to a 10-year, $700 million contract. Ohtani, the prize of this year’s free agent market has twice won the American League’s Most Valuable Player (MVP) award and finished second to Aaron Judge the other year. In addition, Ohtani, who also pitches, finished fourth in the 2022 American League Cy Young award (league’s top pitcher) voting.

Ohtani’s contract has drawn a lot of attention, from the actual size of the compensation to the fact that $680 million of the $700 million will not be received until after his contract expires. Starting in 2034, Ohtani will receive $68 million a year in deferred compensation paid over ten years. The deferred compensation is important for two reasons. First, the time value of money impacts the value of the contract in today’s dollars. By delaying such a large percentage of Ohtani’s contract, it devalues the actual value of money received. Second, there are tax consequences in the deferment of these funds. By deferring this compensation, it potentially moves the money out of California’s jurisdiction, allowing Ohtani to avoid taxation in the state.

This article first examines what the tax consequences of deferred compensation at the federal and state levels and which leagues permit salary deferment. After establishing the law, a deeper dive is taken to address whether California has the right to tax deferred compensations if Ohtani is no longer in the state when the compensation is received. The article then calculates the present value of Ohtani’s deferred compensation, taking into consideration tax consequences and the time value of money. The article will conclude by comparing Ohtani’s total compensation to that of Aaron Judge’s 9 year, $360 million signed last off season to see if the balancing act of tax savings compared to the time value of money is worth deferring the compensation.

Deferred Compensation

Under Internal Revenue Code (IRC) §409A – deferred compensation, is considered taxable income under a nonqualified deferred compensation plan and would be reported in the year the income is made available. At the state level, Ohtani’s deferred compensation would be taxable in his state of residence. Therefore, should Ohtani retire outside the US or in a state with no income tax he would escape California tax on this income. When Ohtani steps on the field for the Los Angeles Dodgers, he will be subject to a top income tax rate of 14.4% which is made up of the top marginal rate of 12.3%, the mental services tax of 1% (on income over $1 million), and the recently uncapped 1.1% state disability insurance tax. Ohtani could avoid paying this rate on the income by deferring $680 million of his salary.

Which leagues are allowed to negotiate deferred compensation into their player contracts and what are the tax consequences in doing this?

Collective Bargaining Agreements (CBA) provide the framework of negotiations between labor and management. Under the National Football League (NFL), National Basketball Association (NBA) and Major League Baseball’s (MLB) CBAs, deferring compensation is allowed, however, under the National Hockey League’s (NHL) CBA it is not allowable to negotiate deferred compensation into their standard player contracts (SPC). Under the NHL’s CBA, Article 50.2 – it stipulates that a player’s salary “shall only be the fixed amount of money payable on account of a particular league year.”

California’s Objection

Ohtani’s contract is the third Dodger contract over the past few years (Mookie Betts, 2020 and Freddie Freeman, 2022) which has included deferred compensation. By deferring compensation, the Dodgers have kept their team’s current expenses lower while also providing their players with a potential tax savings opportunity. Although this seems to be a win-win proposition between the team and its’ players, the Franchise Tax Board of California has taken notice. Between the deferred compensation of Ohtani ($680,000,000), Mookie Betts ($96,000,000) and Freddie Freeman ($33,000,000), the State of California stands to lose up to $113,592,452 in tax from 2034 to 2043.

Although Betts’ and Freeman’s contracts were signed in previous years, and included deferred compensation, it was Ohtani’s large amount which caused California to petition congress to change the current tax law. In a press release on January 8th, 2024 California Controller Malia M. Cohen released the following statement:

“The current tax system allows for unlimited deferrals for those fortunate enough to be in the highest tax brackets, creating a significant imbalance in the tax structure.” said Cohen. “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes. I would urge Congress to take immediate and decisive action to rectify this imbalance.”

In an ironic twist, it was California that initially triggered federal legislation regarding retirement income. Prior to 1996, California taxed the pension of former California residents even though they no longer resided in the state. This prompted Nevada Senator Harry Reid to petition Congress to pass legislation denying California the right to do this. Under IRC § 114, states are now unable to tax retirement income of an individual who is not a resident or have domicile in that state. Under the same code section, Ohtani’s deferred compensation is considered retirement income since they are “part of a series of substantially equal periodic payments” over a period of at least 10 years.

Tax Consequences

Ohtani’s contract calls for $2 million annually for ten years and then deferred compensation of $68 million a year for ten years starting in 2034. Using the current federal and state tax structure and the Dodgers’ schedule, Ohtani’s net after federal and state tax would be $990,384.10 per year or $9,903,841.00 over the length of his contract.

Ohtani’s deferred compensation is a different story. Should Ohtani stay in California while he receives these payments, he will be subject to both federal and California tax. In this situation, Ohtani’s net after tax would be $31,515,384.10 per year or $315,153,841.00 over the ten years. Should Ohtani retire in a state with no state income tax the net would be $41,278,660.10 per year for a tax savings of $97,632,760 over ten years.

Finally, should Ohtani return to Japan, then he will be subject to taxation as a Japanese resident on his worldwide income in the country. However, because the income would be sourced in the US, Ohtani would also be required to pay federal but not state tax in the US on the deferred income. This results in “double-taxation” on this income. To alleviate that burden, the US-Japan tax treaty would allow Ohtani to receive a foreign tax credit in Japan for his US taxes paid. The end result would be a net of $373,987,841.38 over the ten years or a $58,834,000.38 savings in comparison to being a California resident.

Table 1 (Net Compensation of Deferred Payments)

Time Value of Money

The concept of time value of money plays a significant role in analyzing the overall value of Ohtani’s contract because most of his compensation will be received after he retires. In short, the time value of money concept asserts the value of a dollar received today is more valuable than a dollar received tomorrow because of the ability to invest that dollar.

To convert money earned either in the past or in the future into the present value, a rate of 7% was used to represent not only inflation but the loss of potential investment power.

Using this percentage in the present/future value formula(s), we can convert all dollars into today’s dollars, which either will provide an increase or decrease in the contract’s net value, based on when the money is earned or when the dollars are expected to be received. This provides a more accurate depiction of the true value of that contract.

Since it’s unclear where Ohtani will retire and where the deferred compensation will be sourced, three scenarios are detailed below: 1) Staying in California, 2) Returning to Japan, or 3) Retiring in a state with no tax. By deferring compensation and potentially retiring outside California, Ohtani can save between $22,476,723.78 and $37,299,258.33 in tax.

Table 2 (True Value of Contract after tax and Time Value of Money)

The Balancing Act

To escape taxation in California, Ohtani has deferred a significant percentage of his compensation to after his retirement but received no interest income to do so. As a result, it devalues the true value of his contract significantly as Ohtani’s potential $97,632,760 future state tax savings is only $37,299,258.33 in today’s dollar.

To put this in perspective, the true value of Aaron Judge’s contract is only $13,161,694.43 less than Ohtani’s (assuming a Japan residency) despite Judge’s compensation being $340 million less. Should Ohtani choose to remain in the US and retire in a state with no income tax his contract would be $27,984,228.97 greater than Judge’s true value.

Judge’s contract, signed last offseason with the New York Yankee, carries a true value of $137,158,203. This takes into consideration that Judge is subject to not only federal and New York state tax but also New York City income tax. Because Judge’s contract pays the entirety of his compensation in a much more compressed nine years, Judge receives the benefit of allowing the earnings received to grow compared to Ohtani’s contract being spread out over 20 years, with the majority of the earnings paid in the last ten years.

Table 3 (Judge vs. Ohtani Contract Comparison)


Ohtani’s $700 million contract has drawn a lot of attention because of the size of the compensation and the large percentage of deferred compensation. As this article outlines, there are tax advantages to this strategy, however this strategy is a balancing act. What is gained in tax savings is lost by the fact that this compensation’s value decreases over time by giving up the opportunity to invest money sooner. Although Ohtani’s net value after tax is over $200 million greater than Aaron Judge’s contract, Ohtani’s true value is only $13 to $28 million more when the time value of money is taken into consideration. Finally, Ohtani’s situation demonstrates the value of proactive tax planning because incorrectly executing the deferred compensation could leave Ohtani on the hook for a massive tax bill.


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