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How Can Free Agency Professional Athletes Avoid Excessive Taxation?

The free agency option provides a unique opportunity for professional athletes. It gives them time to evaluate their contracts, try to earn more money, and try to reduce tax liability and tax minimization planning. One of the biggest decisions a professional athlete in free agency needs to determine is where they want to live. This can have a major impact on the amount of money the professional athlete pays in state taxes.

Why No Tax States Have the Advantage in Attracting Professional Athletes in Free Agency

There are seven states in the United States that do not collect state tax. Other states, like California, may collect up to 13 percent state income tax. As a result, tax minimization planning strategy for some free agency professional athletes includes playing for teams in states where there is no income tax. This means that they would not pay state income tax on their signing bonuses nor on any endorsement earnings.

If that’s not possible, some professional athletes in free agency try to play for states that are close enough to no-tax states so that they can make their domicile home a non-tax state and easily travel to the state where their team is located. This tax minimization planning strategy does have some downsides. For example, in order to benefit from a non-tax state, a professional athlete needs to prove that they were in their domicile state for at least 183 days during the year. Many states, like New York, are aggressive in demanding that professional athletes who play on their teams prove that they were in their domicile state for at least 183 days. If this cannot be proven, New York will attempt to collect income tax on signing bonuses and endorsements. Certain teams in no-tax states have played up the fact that players who live in the state don’t pay taxes. They may tell a professional athlete in a free agency category that if they play for another team in a state with state taxes, that team would have to offer X amount of dollars to be the equivalent of what the team in a non-tax state is offering when state taxes are factored in. The tax minimization planning strategy of moving to a no-tax state doesn’t always work for younger players who are looking to just get on the team and make money. It also does not always work for veterans, especially if they have been established in a certain state for a while and have children in school who may not want to move.

How Can Professional Athletes in Free Agency Mitigate Excessive Taxation?

A tax minimization planning strategy that might work is setting up an LLC for income derived from endorsements. These individuals could use loan-out corporations to minimize the amount of money they pay in taxes. This will need to be well planned out. The cost of starting an S Corp can be expensive. Thus, a cost-benefit analysis should be done to make sure that a player is actually saving money.

Benefiting from Sound Financial Advice

Fusion CPA is a firm that works with professional athletes in free agency looking to take advantage of tax minimization planning. We offer CFO advisory services to free agency professional athletes. Our goal is to help you create tax strategies designed to minimize the taxes you pay on signing bonuses, endorsements, income tax, and federal tax. We work with professional athletes to help them hold on to more of their money today while making decisions that can lead to financial security in the future. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.