The excitement turned to sheer horror when I realized what I was going to be paying in taxes. Let me take you back. I had just signed my first professional contract and my mom sat me down to talk through taxes.
You see my mom had an accounting background so she was quick to point out that taxes mattered. She showed me how more than 40% of my signing bonus would be heading to Uncle Sam.
As a professional athlete, taxes are your largest lifetime expense.
The good news is with proactive planning and a specialist in athlete wealth management you can reduce your lifetime tax bill.
In this guide, I will walk you through how to think about taxes, types of income, tax strategies to consider.
Said another way, I will show you what tax planning for professional athletes should entail.
Tax Planning For Professional Athletes
According to Statista the average salary for the four major sports leagues is north of $4,000,000. The top federal tax rate is 37%. This means the average athlete is paying more than $1,000,000 in yearly taxes.
To understand how to think about taxes we must first understand how they work. The current federal tax brackets are listed below:
Each taxpayer pays a certain rate based on their filing status. You can either file as single, married filing separately, head of household, or married filing jointly.
Once you determine your filing status you pay each tax rate up to a certain amount. Think about this like filling up buckets of water. Once one bucket is full, the water (money in this case) flows to the next bucket.
Example: If you make $1,000,000 in a year and you file single. You will pay the following rates:
10% on the first $11,600
12% on the next $35,550
22% on the next $53,375
24% on the next $91,425
32% on the next $51,775
35% on the next $365,625
37% on the last $390,650
While you are in the top tax bracket (37%), you don't pay 37% on every dollar that you make. In this scenario, you pay just a little more than 33% of your $1,000,000 of income.
In addition to federal income taxes, you will pay state income taxes as a professional athlete. State income taxes range from 0% up to more than 13% in 2024.
State taxes for professional athletes work like this. For all the money that you earn on the field, you will pay tax in the state in which you earned the money. In addition, if your state of residence has a higher state income tax than the state you play, you will also owe taxes there.
Example: You are a California resident and your team is playing several games in St. Louis, Missouri. You will owe 4.80% of Missouri state tax plus 8.5% to California. This is due to California having a 13.30% state tax. If instead, you were a resident of Florida, you will still pay the Missouri tax for the games played but no state taxes above that.
As a professional athlete, you don't need to be the expert but you do need to be educated. Gaining a better understanding of tax planning for professional athletes can greatly benefit you.
After all, it is your largest lifetime expense.
Types of Income
To understand taxes you have to understand the types of income you can make as a professional athlete.
1099 Income - This is the money that you make off the field (endorsements, signings, sponsorships).
There is far more optionality with this type of income than on-field income. Professional athletes can deduct most costs incurred with earning this income.
Example: If you are an autograph signing, you can deduct all travel expenses required to facilitate the autograph signing.
1099 income is also taxed in the athlete's state of residence.
Example: If you are a Florida resident and you make $50,000 in off-field income there will be no state tax due on this money. You will still pay federal income taxes on this money. This is another reason why your state of residency matters.
W2 Income - This is the money that you make on the field (salary and bonus from the team).
With W2 income you will be taxed in each state that you earn the money. If you are playing a game in California you will owe federal and California state taxes for that game.
The key is understanding the nuance of tax planning for professional athletes. Remember our earlier example:
Example: You are a California resident and your team is playing several games in St. Louis, Missouri. You will owe 4.80% of Missouri state tax plus 8.5% to California. This is due to California having a 13.30% state tax. If instead, you were a resident of Florida, you would still pay the Missouri tax for the games played but no state taxes above that.
In this example, you see how it pays to consider being a resident of a low-tax state. It provides you as the athlete the most optimal tax situation.
As with everything, taxes shouldn't be the sole driving factor but it can save professional athletes hundreds of thousands or millions of dollars in lifetime taxes.
Current Year vs Future Year Tax Benefits
In athlete wealth management, we are always thinking about the current year versus the future year's benefits. Much of this depends on what tax rate you are in as an athlete.
Current Year - This means you are getting a tax benefit in that given year.
Future Year - This means you are getting no current year tax benefit but you will get a future year one.
Consider the athlete wealth arc ~ it is sharp ups and downs. With that comes increasing tax rates followed by decreasing tax rates. As an athlete, you have to focus on reducing your lifetime tax bill, not your yearly tax bill.
This means sometimes making decisions that are future year ones in the current year. Said another way ~ to pay the lowest amount of lifetime taxes might mean paying more in the current year.
Example: If you are receiving a large signing bonus or in the middle of a free-agent contract you might want to focus on the current year. The reason is simple you will be in the highest possible tax bracket (37% federal) tax bracket). If you are in year one of retirement or in the minor leagues your income will be far less. This is when you will want to focus on future year tax benefits. The reason is simple you will be in a lower bracket (10 - 24% federal tax bracket)
The IRS sets the rules of the tax code but you get to choose how you maximize those rules. The single best framing to view this through is current year versus future year tax benefits.
This requires proactive planning on the part of your financial team. You need to have a specialist that understands your situation today and where you are headed in the future.
We have helped clients save hundreds of thousands of dollars through proactive tax planning that otherwise would have been missed.
Tax Strategies
The challenge with professional athletes is there is no one size fits all when it comes to tax planning strategies. Yes, we want to reduce your lifetime tax bill but we also want to always ensure those strategies are getting you closer to meeting your specific goals.
You will hear countless tax strategies in the locker room ~ it does not mean they are right for you.
Step one is understanding what you are trying to accomplish.
Step two is determining what your current and future situation looks like.
Step three is combining those first two steps to execute the correct strategies.
See how that works? Chances are what you implement is going to be different than our teammate.
Here are some of the most common strategies athletes need to consider:
State Residency
Legacy Planning
Charitable Giving
Contracts Structures
Tax Efficient Investing
Retirement Accounts
Duty Day Calculations
Tracking Deductions/Expenses
Example: You are earning $1,000,000 in taxable income.
Maximize your 401(k) contributions. ($23,000 tax deduction)
Changed state residency from Missouri to Florida. (~$50,000 tax savings)
Contribute 5 years of giving or $50,000 to a Donor Advised Fund. ($50,000 tax deduction)
You can see how quickly your tax bill can be reduced by considering the right strategies to use in a high-income year. This is only scratching the surface of what should be considered as a professional athlete.
The thing to remember is your situation is unique, you need a specialist in athlete wealth management to optimize it.
My advice is to ensure that you have a financial team that is proactively looking at all the tax planning options for you as a professional athlete.
I have seen time and time again professional athletes come to us after unknowingly leaving money on the table.
Look there is no way around paying taxes but you can plan around them.
The IRS sets the rules of the game but you get to determine how you play the game.
Done right it can save you thousands, done poorly you can leave the IRS a massive tip.
If you are a professional athlete looking to reduce your lifetime tax bill schedule a call and talk to a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
1. Are professional athletes taxed in each state they play?
Yes, athlete pay taxes on their salary or W2 income in each state they play. Signing bonus money and off-field income is taxed in a player's state of residence.
2. What types of income do professional athletes earn?
Professional athletes earn W2 income and 1099 income. W2 income is what is earned from salary, we call this on field income. 1099 income is what is earned through endorsements, we call this off-field income.
3. What can professional athletes do to reduce their tax bill?
The number one thing professional athletes can and should do is plan ahead. Proactive tax planning with your financial team can save athletes significant money on their lifetime tax bills.
4. What types of retirement accounts should athletes consider?
The large majority of professional athletes will have access to a 401(k) through their team. This provides athletes with a tax deduction on money contributed. In addition, athletes should consider Roth IRAs, Sep IRAs, and Solo 401(k)s to further reduce their lifetime tax bill.
5. How does Moment Private Wealth help athletes lower their tax bill?
Tax planning for professional athletes is one of the biggest things we help our clients with. It is key for professional athletes to have specialists in athlete wealth management to optimize their tax 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.
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