Arguably the biggest misconception athletes have is the difference between what their contract says and what hits their bank account.
We (me included) all first think that our contract number is a good measure of what we will get when in reality it is often 30 - 50% less than that.
The role taxes play for professional athletes cannot be understated.
They will be your largest lifetime expense and it isn't even close. That is the bad news.
The good news?
We can and should be planning for them. After all, consider if you had any other large expenses, you would want to do your research to make sure you are not overpaying.
I want you to think about taxes the same way. They are an expense that can be reduced. The key is understanding how tax planning for professional athletes can be optimized.
In this blog, I am going to break down 10 tax planning strategies for professional athletes.
Taxes for Professional Athletes
Individual tax returns were due on April 15th of this year. For most athletes the first time they started thinking about this was a few weeks before that.
That inherently is the problem. There is almost nothing left to plan for other than what you will owe by then.
If you read nothing else in this article, read this: tax planning and tax preparation are two different things.
Tax Planning: Looking out in the future to find ways to lower your lifetime tax bill.
Tax Preparation: Reporting on everything you did in your tax planning and letting the IRS know.
One is proactive and saves you money, the other is reactive and is only doing what is required.
One of the biggest mistakes professional athletes can make in choosing a financial team is choosing a team that cannot provide guidance on taxes.
Here is a little secret ~ the vast majority of financial firms (think big banks) cannot provide tax planning to clients.
Remember how we said taxes are your biggest lifetime expense?
Now consider that the most integral part of your financial team, your advisor, might not be able to give you planning or guidance on taxes.
That is a recipe for overpaying on your taxes, something you can and should avoid.
So let's dive in and discuss ten tax strategies for professional athletes.
1. State Residency
Income is taxed at two levels, the federal level and the state level.
While the federal level applies to all US citizens, the state level varies depending on your state of residence.
This ranges from 13.3% for California residents down to states with zero income tax such as Florida and Texas.
Consider that is a $130,000 difference for every $1,000,000 earned between California and Florida.
Establishing residency in a low or zero-income tax state can save athletes hundreds of thousands to millions of dollars in lifetime taxes.
So, how can you establish state residency in a low-income tax state (the right way)?
State residency is determined by a series of facts and circumstances.
The following is a good starting point for athletes considering a change in state residency:
Establish a full-time residence
Obtain a state driver's license
Register your vehicle with the state
Obtain insurance coverage in the state
Change your mailing address for all bills
Register To Vote
Live There
State residency is not a black-and-white issue.
It is instead about stacking undeniable proof that this new state is your primary residence.
Professional athletes should look to execute this with a qualified financial team that has experience handling multi-state taxation and residency.
2. Retirement Accounts
Retirement accounts are all about optimizing for your lifetime tax bill.
Current Year Benefits - This provides a tax deduction in the current year and you will owe taxes in the future. Current-year benefit accounts are traditional retirement accounts.
Future Year Benefits - This provides no tax benefit in the current year but future year tax benefits in the form of tax-free growth/distributions. Future-year benefit accounts are those with the Roth prefix.
Example: If you are in the 37% federal income tax bracket today but projected to be in the 22% federal income tax bracket in the future your focus should be on current-year benefits.
Lower tax brackets today focus on future-year tax benefits
Higher tax brackets today focus on current-year tax benefits
Most Common Types of Retirement Accounts
Solo 401(k) – Restricted to businesses with no employees or if your spouse is the only other employee. This is a great option for NIL athletes or those earning off-the-field endorsement income.
401(k) – The most common retirement account and is provided by your team. 401(k) access and opportunities vary by league. For a deeper dive into league benefits for Major League Baseball and The National Football League check out our player's benefits articles.
IRA – This is easy to set up and comes in three forms: Traditional, SEP, and Roth accounts. Each provides unique benefits, limitations, and opportunities.
3. Investment Strategies
The two best times to pay taxes are never or later.
As an athlete, you will have 40+ years of compounding for your investment portfolio. Our goal is to grow that money while at the same time paying as little in tax as possible.
The thing that matters far more than your rate of return is your after-tax rate of return.
Said more simply, what you keep matters more than what you make.
As an athlete builds an investment portfolio, the focus should be on after-tax return.
We do this for athletes by focusing on the following investments:
Exchange Traded Funds
Municipal Bonds
Direct Indexing
Combine that with strategic rebalancing and you set yourself to make taxes a priority not an afterthought in your investment portfolio.
4. Donating Money
One way to give back and reduce your tax bill is through strategic gifting.
The key term here is “strategic”. An athlete’s earning lifecycle is condensed into roughly one decade or less.
This means we want to take advantage of high-income years today (through gifting) but give ourselves optionality to give money away long after our playing career ends.
The single best tool to do that is a Donor Advised Fund (DAF).
Here is how it works:
A Donor Advised Fund is an account that allows you to donate money, take a current-year tax deduction, keep the money invested, and give it out over future years.
Example: You are earning $5,000,000 yearly and want to give away $10,000 yearling over the next twenty years. To maximize his tax benefits, we might recommend giving $100,000 or more in the current year to a Donor Advised Fund. This allows us to get a large tax deduction in year one but provide grants to our favorite charities over time.
I am yet to meet any athlete who wants to give more money to the IRS and less to their favorite charity.
A Donor Advised Fund is a great way to accomplish that.
5. Types of Income
To understand taxes, you need to understand the types of income.
Professional athletes earn two types of income, W2 and 1099.
One is a result of work you do on the field (W2) and the other is the result of work you do off the field (1099).
The type of income will drive the rules, strategies, and placement of income as it comes in for an athlete.
Once you understand the type of income you are earning you then can determine which strategies to focus on.
6. Deferring Income
It doesn’t matter what you get paid, it matters what hits your bank account. This couldn’t be truer when we think about planning around income.
Accelerating income (taking in more in one year) or deferring income (pushing some out) can significantly impact your tax bill.
This is especially relevant for professional athletes closing in on the “next” income tax bracket.
Example: You are earning $350,000 in taxable income for the year. You just landed an endorsement deal that will provide you with an additional $100,000 of income.
The 32% federal income tax bracket starts at $364,201 (married filing jointly in 2024).
This means the first $14,201 will be taxed at 24% but the other $85,799 will be taxed at 32%
This is a net cost of an additional $6,863 in taxes. If you pushed that money into a future year it could provide additional tax savings.
7. Roth Conversations
The two best times to pay taxes are later or never.
My estate planning attorney once told me that and while generally true there are exceptions.
The biggest one is Roth conversions.
Remember the goal is not to pay the lowest amount of tax in a single year but rather to pay the lowest amount of tax over your lifetime.
A Roth conversion is the process of taking money in an individual retirement account (IRA) and moving it (converting) to a Roth IRA.
Where this comes into play for professional athletes is the years of lesser income. Consider for a second that the average professional career is less than five years and you can start to see the opportunity:
High Income
High Income
High Income
High Income
Lower Income (Roth Conversion)
Example: You convert $100,000 while in the 22% tax bracket at the age of 30. This results in a current year tax bill of $22,000 ($100,000 X 22%) but provides you tax-free growth for decades. This can result in hundreds of thousands in lifetime tax savings when executed correctly.
8. Tax-Loss Harvesting
Tax loss harvesting is when you sell a position (one at a loss) and buy an “equivalent” position (similar but not the same position).
This allows you to do two things:
Capture the loss for taxes (more on that later)
Continue staying invested in the market to capture the upside
Example: You bought $1,000,000 of a growth fund that is now down 10% or $100,000. You can sell that fund, immediately rebuy a similar fund (another growth fund), and capture the $100,000 loss. This provides you a tax asset of $100,000 for future years in which you might sell an investment and take a gain.
Those losses can be used up to $3,000 per year to offset ordinary income. Additional losses can be used to offset capital gains income in the future.
***Unused losses can be carried forward into all future years.
9. Quarterly Estimates
It pays to be up to date on your projected tax bill.
While the team will withhold taxes from your salary, this does not mean it is the correct amount. In addition, off-field income is generally the athlete’s responsibility to report to the IRS.
This is where quarterly estimates come into play.
A quarterly estimate is a payment of projected taxes each quarter.
This is something that your financial team (Financial Advisor & CPA) should be working together on each quarter.
To ensure a penalty-free year you must reach the Safe Harbor Rule. For professional athletes, this means paying:
90% of Current Year Income Tax Liability
or
110% of the Previous Year’s Income Tax Liability
This is where a qualified team of advisors can save athletes thousands of dollars in penalties and fees.
10. Estate Planning
Estate planning is for old people and athletes are young, right? Wrong.
Estate planning is simply deciding where your assets go when they go there, and how they get there.
It is a financial roadmap for when you are no longer able to articulate the plan.
Estate planning is even more critical for high-earning athletes due to something referred to as a Death Tax.
Here is how it works:
If your estate (everything you own added up including life insurance) is more than 13.61 million in 2024 you are subject to it.
That tax is a staggering 40%.
The good news? You can plan now to avoid it in the future.
A properly executed estate plan can help to mitigate, reduce, or fully eliminate an estate tax liability.
The best time for tax planning as a professional athlete is today.
You set yourself up for future flexibility and a lowered lifetime tax bill.
If you are a future, current, or former professional athlete looking for tax planning schedule a call with a founder.
Look, we get it, taxes can be frustrating, confusing, and downright overwhelming.
At Moment, our mission has stayed the same since day one.
To build a firm focused on helping the people we know best, athletes and entrepreneurs.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
How does Moment Private Wealth help athletes with tax planning? At Moment we provide quarterly projections, tax strategies, and work in coordination with our client's CPA to ensure every client is paying the lowest amount of tax possible.
When should professional athletes be planning for their tax bill? We believe that good tax planning is year-round.
How do you work with CPAs? We believe in the power of the team and our job is to make sure your entire tax team is aligned. The best strategies mean nothing without proper implementation and execution.
What is the biggest tax strategy professional athletes should consider? I will give you the best worst answer, it depends. It depends on what you are trying to accomplish and the details of your situation.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
