Now that the House and Senate’s Tax Bill has been signed into law, its time to take a closer look at what the numbers reveal for professional athletes.
Introduction
The most obvious change with the new tax law for professional athletes is the lowering of tax rates for all income levels. Though everyone will be affected differently, analysis of these changes highlights a few certainties. First, most athletes will benefit from the lower tax rates. Second, the loss of certain itemized deductions will negatively affect those playing in highly taxed cities and states. Third, single taxpayers will not benefit as significantly as those who are married. Finally, as the below article explains, the new tax law will make individual state tax issues for professional athletes even more important to understand. With 20 of the 24 states in which professional athletes play implementing their own version of the ‘jock tax’, it is now even more important than ever to have professional guidance from an individual who specializes in understanding all the unique issues that face professional athletes.
Analysis
For married individuals, this means that an athlete earning $100,000 is expected to receive an additional $2,549 in tax savings while those earning $30,000,000 will receive a tax savings of $789,683. Although, all levels of income receive some tax savings, the savings is not equal. Depending on one’s income level, the tax savings will range from a high of 5.93%, for those earning $250,000, to a low of 2.55%, for those earning $100,000. As the table below indicates, those making between $250,000 and $1,00,000 receive the greatest tax savings by percentage.
Table 1 – Married: Percentage of Tax Savings
Single athletes will also be saving under the new tax law. An individual earning $100,000 will save $2,612 and those earning $30,000,000 will save $772,260, slightly less than their married counterparts.A closer look at the numbers compares the difference between married and single.
Unlike married athletes who receive the highest percentage of tax savings between the income levels of $250,000 to $1,000,000, those who file single at the same income levels unfortunately receive the lowest percentage of tax savings. Higher earners, conversely, will receive greater savings. In reviewing the table below, those earning over $1,000,000 gradually receive a higher percentage of tax savings as their income increases.
Table 2 – Single: Percentage of Tax Savings
Limits on Deductions
The loss of being able to deduct state and property taxes over $10,000 and the total elimination of deductions for business related expenses for professional athletes is a substantial loss. Professional athletes play in multiple states and pay both resident and non-resident state tax, often referred to as a ‘jock tax,’ in each state and city in which they play. Even those players who reside or play in states with no state tax are still affected by the limit on their state tax deductions paid for games played on the road.
Tax Losers
Analyzing the NBA, NHL and MLB (using a salary of $2,500,000) found that 32 of the 82 (39%) US based teams studied showed that the loss of deductions erodes their potential tax savings.
Table 3 – Married: Largest Tax Increase Due to Loss in Deductions
As the table above indicates, athletes who perform services in or are residents of states with high income taxes will be most negatively affected. Individuals playing in California or New York will see a 5% to 6% increase in taxes paid in 2018 while those in Minnesota, Oregon and New Jersey will see an increase anywhere between 1% and 2% in additional tax.
Tax Winners
Even with the loss of deductions, teams in income tax-free states are the big winners, while States with low taxes, such as Illinois, Indiana and Louisiana break-even. Overall 61% of the 82 teams we studied, players earning an income of $2,500,000 will not be affected or show a tax savings, even when taking into consideration the loss of deductions. The following chart shows the teams whose players will receive the greatest tax benefit:
Table 4 – Married: Tax Savings Despite Loss in Deductions
How do the NHL Teams Rank?
Below find the 31 NHL teams ranked by the greatest percent change they will receive with the new tax law.
In determining the percentage of tax change, the current and future tax liability of every team was calculated using the leagues average salary of $2,916,316. It was assumed that those on Canadian based teams would file as a Canadian resident, therefore any change in the US tax code would not affect these individuals.
Married
Outcomes in the NHL align with trends previously outlined in my previous article, The New Tax Law and You. Notably, like in other professional sports leagues, there is a difference between how the new law will affect married couples as opposed to individuals. As chart 5 indicates, 79% of the players (18 out of 24 US based teams) who are married, will benefit from the new tax law.
Table 5 – Married: NHL
The $85,507.02 savings for players on the Stars, Panthers, Predators, Golden Knights and Lightning represent the maximum savings and is nearly an 8% discount in tax. The BlackHawks, Coyotes, Avalanche, Bruins and Hurricanes also receive a sizable discount in tax between 4% to 6%, while teams based in California and New York City face a 3% increase in tax.
Single
Although, 62.5% still benefit from the tax change, the teams based in states with no tax will now save just over 6% while teams based in California and New York City will pay over 5% more tax next year. In addition, as the table below indicates, players who are single playing on the Devils, Wild, Sabres and Capitals unlike their married counterparts will face an increased tax liability.
Table 6 – Single: NHL
Conclusion
In summary, since players based on teams in Florida, Nevada, Tennessee, Texas and Washington are subject to the lowest potential jock tax, they would benefit the greatest from the new tax law. The current law places restrictions or limits on deductions based on income and thus, individuals on teams based in states with no tax, generally won’t have enough in state tax or agent fees alone to itemize. Because of this, they already take the standard deduction as it provides the greater benefit. The new law will double the standard deduction for married and single taxpayers. This, coupled with the lower federal tax rates at all income levels, in most cases, will equal greater tax savings. Players that reside in places with high income taxes are conversely hurt by this change as they generally have a high level of itemized deductions that will no longer be applicable.
Overall, everyone is going to be affected differently as every individual’s situation is unique, but everyone should be aware of the effects of the new tax law for effective future tax planning.
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003