Tax Reform May Bring Bigger Tax Liability for Athletes
With a large salary comes a large tax liability for athletes, and that could be going up following tax reform. The Tax Cuts and Jobs Act brought benefits to many individuals, but athletes may notice some negative effects from it. Below we cover two significant changes that could increase an athlete’s tax liability and how they can still benefit despite these changes.
Elimination of Unreimbursed Business Expenses
Before 2018, athletes could deduct expenses such as agent fees, club or league dues, sports equipment, training, and temporary housing among many other items, as unreimbursed business expenses on Schedule A of their tax return, subject to certain limitations. These expenses reduced their taxable income, which made sense since they directly related to their employment.
Starting in 2018, however, these expenses are no longer tax deductible, regardless of your profession. With an athlete’s agent fees ranging from 3% – 5% on average, this alone is a sizeable loss. On an annual salary of $5 million with a 5% agent fee, a $250,000 expense must still be paid but is now not tax deductible. At the highest federal tax bracket of 37%, that results in an additional $92,500 each year, and that’s not factoring in state or city taxes. Combine this with not being able to deduct dues, training, and a number of other expenses and athletes will be feeling the pain of the tax law changes.
New $10,000 Cap on State and Local Taxes Deduction
Before 2018, athletes could deduct state and local taxes, including withholding, estimates and extensions, along with real estate and personal property taxes, as an itemized deduction.
Beginning in 2018, these taxes will be limited to a total cap of $10,000 for any taxpayer. Athletes are subject to the jock tax and must pay income taxes in every state in which they play. For those who live or play in states with a high tax rate, like California or New York, or have expensive, or multiple, personal residences, they will again be feeling the pain of lost tax deductions.
Opportunities for Athletes
With significant changes negatively affecting athletes, should they just throw in the tax towel? Absolutely not. There are a few changes that can benefit athletes including the new individual tax rates. The top tax rate for individuals was lowered to 37%, offsetting some of the lost deductions above. Athletes can also consider a couple tax planning opportunities to help even further:
- Relocation to a tax-free state – with the cap on the state and local taxes deduction, now more than ever, athletes benefit by living or playing in a tax-free state
- Restructuring of bonuses – an athlete’s regular salary is subject to the jock tax and can be taxable in each jurisdiction in which they play. However, if structured properly, bonuses may only be taxable in their home state. If this is a state that does not have an income tax, such as Florida or Texas, the tax savings could be significant.
Despite two big tax changes impacting athletes, with some proper tax planning, they can get back in the tax game. Contact an Anders advisor to discuss your specific tax situation. Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business.