Free agency provides a few unique perks for professional athletes, additional time to evaluate their contracts, try to earn more money, and try to reduce tax liability and tax minimization planning. One of the most significant decisions a professional athlete in free agency needs to determine is where they want to live. This decision can have a substantial impact on the amount of money the professional athlete pays in state taxes.
No Tax States Have the Advantage in Attracting Professional Athletes in Free Agency
Seven states in the United States do not collect state tax. Other states, like California, can collect up to 13 percent state income tax. A tax minimization planning strategy for some free agency professional athletes is to try to play for teams in states where there is no income tax. This decision could mean that the athletes may not have to pay state income tax on their signing bonuses or possibly 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 to make their domicile home a non-tax state and easily travel to the state where they play. This tax minimization planning strategy does have some downsides. For example, to benefit from a non-tax state, a professional athlete may have to prove that they were in their domicile state for at least 183 days during the year. Like New York, many states 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, the state of New York may 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 free agency 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 looking to make money. It also does not still work for veterans, especially if they have been established in a particular 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 may be able to use loan-out corporations to minimize the amount of money they pay in taxes. This will need to be well planned out with an experienced professional athlete, CPA. The cost of starting an S Corp. can be expensive. A skilled accountant should assist you with things like cost-benefit analysis to make sure that a player is saving money.
Benefiting from Sound Financial Advice
Fusion CPA is a CFO advisory firm that works with professional athletes in free agency looking to take advantage of tax minimization planning. We can help you create tax strategies designed to minimize the taxes you pay on signing bonuses, endorsements, income tax, and federal tax.
Our goal is to work with professional athletes to help them hold on to more of their money today while making decisions that can lead to financial security. Learn more about the tax minimization planning services we offer to professional athletes in free agency by pressing the button below to schedule a discovery call.
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.