Just Google your name, what comes up? Well for most people, it might be a career accomplishment or their LinkedIn profile.
For professional athletes, you will be able to find exactly how much money they made, what team they played for, and probably guess how much they paid in taxes.
Those tax bills are high and everyone wants their piece of those big contracts.
So, let's play this out, you are a state where MLB, NFL, NBA, and NHL teams visit frequently. You would be crazy to not want your share of that revenue.
After all, we aren't talking about pennies here, we are talking about millions of dollars in potential tax revenue.
This concept led to what we now know as the jock tax. Simply put the jock tax is a tax levied against professional athletes who spend time playing (and earning money) in cities and states where games are held.
Understanding the jock tax is one of the single best nuances to know when it comes to tax planning for professional athletes.
In this blog, I am going to cover how the jock tax started, what it means for professional athletes, and the key factors to consider.
Jock Tax
The jock tax has been around for decades but didn't come to the forefront until 1991.
You see in 1991, a little-known basketball player named Micheal Jordan was in the prime of his career. His Chicago Bulls had just beaten the Los Angeles Lakers in the NBA finals.
While the city of LA was grieving its loss, tax officials were busy letting Michael Jordan's CPA know that he was going to owe taxes in California for the games played there.
Thus the jock tax, as we know it today become a hot-button issue for professional athletes.
Today the jock tax applies to nearly every state that imposes a state income tax and many cities that host major sports teams.
In practice, it requires athletes to calculate duty days (how many days they are present in each state), formulate tax strategies, and ensure proper filings in multiple states every year.
It is a game of tax chess that without proper knowledge and implementation can cost athletes hundreds of thousands if not millions of dollars in taxes.
Let's dive in...
Jock Tax Explained For Professional Athletes
On the surface, the jock tax is pretty simple, if you play there you pay there.
The reality of how this works as a professional athlete is a bit more complicated.
Consider how many states you might play in during a season:
NFL players are looking at 8+ states.
NBA players are looking at 15+ states.
MLB players are looking at 20+ states.
You can thank the jock tax for having to file in more than all those states.
In a traditional job, where you work in one state and even if you travel to your company's second location you are not subject to taxes in that state.
For professional athletes, it works in reverse. Each state that an athlete plays in must be reported on their tax return.
That means athletes must be tracking where they are playing and how many days they are spending there.
Let's use an example:
You play 100 games throughout the season and five of those games are played in Missouri.
Missouri state income tax is 4.95%
5% of a $1,000,000 salary = $50,000
$50,000 (MO state portion) X 4.95% (MO state tax) = $2,475 in Missouri state taxes
***Many cities will also charge city tax for the games a professional athlete plays there.
To fully understand how this works let's continue with our example:
If you are an athlete with Florida residency (0% state income tax) you would pay no additional state taxes beyond the Missouri portion for those games.
If you are an athlete with California residency (13.3% top state income tax) you would pay an additional 8.35% at the end of the year to California. This is the difference between California state income tax (13.3%) and Missouri state income tax (4.95%).
The thing to remember as a professional athlete is if you play there, you will pay there.
Jock Tax Strategies for Professional Athletes
Look there is no way around paying taxes as a professional athlete. Taxes will be your largest lifetime expense.
The good news is you can and should plan around it. When it comes to jock taxes, we have seen athletes overpay states by hundreds of thousands of dollars without proper planning.
Here are two tax planning moves athletes should focus on:
Hire A Specialized Team
Ok, let's be real you are in the .000000001% of people to ever play the sport you are playing. You need to consider your choice of financial team to be just as specialized as you are.
You want to ensure your financial advisor and CPA work in unison and have deep expertise in multi-state taxation for athletes.
The two biggest mistakes I see athletes make are hiring generalists when they need specialists and not having a team working alongside each other.
Consider this:
You are an athlete preparing for your upcoming season when your CPA calls letting you know your duty day calculation might be incorrect. You are scrambling to find the right documents, make the necessary phone calls, and still prepare for the season.
When instead if you were working with an integrated team like how we operate at Moment, your advisor and CPA would be proactively tracking down this documentation throughout the year to ensure correct calculations.
Now this is assuming your CPA and advisor understand duty day calculations in the first place. Forgive me for sounding blunt but this is too important to ignore. This is not the time, place, or team where you should be hiring friends. You need to hire experts who have experience or you just might be tipping the IRS.
Track Duty Days
The best way to ensure your financial team provides you with the best tax estimates is to give them the best information. This includes where you were during the playing season.
Now there are some easy hacks to track this that I used throughout my career, the easiest of them all being using your credit card for all purchases. Do this and you can easily go back and trace where you were over a certain week or month.
In addition, teams do their best to provide the correct withholding for states when the team is playing there. Just remember this is a starting point, not the final word when it comes to your tax bill.
An example:
If you spend time on the injured list throughout the season, the team is not tracking your location. If you are spending time rehabbing an injury and are away from the team this could affect your state tax calculation. It is critical to ensure your advisor is aware of these moves during the year.
This might sound significant in the grand scheme but I am telling you right now it isn't. We have saved clients hundreds of thousands of dollars on previous mistakes with duty day calculations.
The checks are too big and the opportunity cost is too great not to be planning around this.
Jock Tax Considerations
You will hear plenty of wild stories in the clubhouse, many of them around taxes.
They usually start with a legitimate strategy an athlete's financial team proposes but by the time the third player hears about it ~ we are in the telephone game.
I say this because theory is often different than reality when it comes to tax planning for professional athletes.
In theory, establish residency in a zero-income tax state, sign with a team in that state, and play your entire career there.
In reality, life changes a lot from draft day, rarely do you have a choice of who you play for, and the chances of you spending your entire career in one place are slim to none.
The key is not trying to predict the future but rather being educated on your options, tax considerations, and tracking key information.
Jock tax is one of the most misunderstood concepts in professional sports locker rooms. It is also one of the biggest levers to pull in tax planning for professional athletes.
You want to make sure that your financial team is a specialist in athlete wealth management.
This means they understand terms like:
Duty Days
Multi-State Taxation
Jock Tax Strategies
We have worked hand in hand with professional athletes saving them hundreds of thousands of dollars when these calculations were done incorrectly.
Remember taxes are your largest lifetime expense and proper tax planning is critical to maximizing your earnings as a professional athlete.
If you are a future or current professional athlete looking for help understanding the jock tax and the role it plays for you schedule a call with our team.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions received regarding MLB service time:
What is the jock tax for professional athletes? It is a tax imposed on professional athletes for the time spent playing in certain states and cities.
How is the jock tax calculated? The jock tax is calculated based on duty days. Duty days are the days a player has during a professional season. If a player has 100 duty days during his season and spends 10 days in a certain state or city, thus 10% of his income earned during that season would be allocated to that state.
Can professional athletes plan around the jock tax? Yes, players and their financial teams must understand how the jock tax works. The biggest step here is tracking your days in each state that you either played or were present during your playing season. Players should not solely rely on the team to ensure this number is correct.
What if my previous financial team missed my duty day calculation? You can go back and file an amended tax return reflecting the correct duty day calculation within a certain time period.
What if a state withheld too much in taxes for my days spent there? You can file to have those taxes returned to you but you will need to show that state proof of your duty day calculation and supporting evidence.
*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.
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