5 Tax Strategies for Professional Athletes to Increase Net Income
The high salaries and bonuses for professional athletes can be impressive, and often convey an appearance of almost instant wealth. But what is less obvious is the effect of taxes, which can reduce net income dramatically. A well-paid athlete will usually be in the highest income tax bracket, with rates as high as 50% in some European countries. The US tops out at a modest 37%, but there are also variable state taxes between 2% and 13%.
The bottom line is that professional athletes can expect to pay half of their salary in income taxes unless they employ effective and tested tax strategies to increase net income. Mitigating the effect of income taxes along with effecting budgeting methods are central tools used in wealth management for athletes.
5 Tax Strategies for Professional Athletes
1. Choose a Tax-Advantaged Domicile
Professional athletes in the US are in a unique position where they can choose a low-tax state as their domicile. Several states like Florida and Nevada have zero income tax, which can increase income by as much as 13% over a California residence. Athletes from other countries have been known to switch their domicile to a low-tax jurisdiction for the sole purpose of minimizing taxes.
2. Understand and Manage the Jock Tax
The so-called ‘jock tax’ in the US is triggered when an athlete plays a game or event in a state outside of their domicile. In that case, the portion of their salary attributed to that game is taxed locally as though they were a resident. It can't really be avoided, as it's a large revenue boon for those states. But an athlete can predict their tax bill more accurately if they review the season schedule and calculate the overall average tax rate. There will be a combination of low and high tax rates applied for each game to arrive at the average rate.
3. Claim Business Expenses
Athletes often have opportunities to claim tax deductions for certain expenses, but it depends on the income source. Players for sports teams in the NBA or NFL are typically employees, which limits their ability to deduct business expenses. But, a professional tennis player is essentially self-employed, which opens up a wide range of deductions. Team players with separate endorsement deals can also categorize those earnings through their own business, and make expense deductions from income. Valid deductible business expenses include agent fees, trainer fees and equipment, nutritional supplements, and even league fines.
4. Take Advantage of Tax Write-Offs
Whether an athlete is an employee or self-employed, they will want to take advantage of standard individual tax write-offs to lower their tax bill. There are allowable deductions for charitable contributions, mortgage interest payments, and retirement plan contributions. These can be significant deductions and should be one part of core tax strategies for professional athletes.
5. Maximum Contributions to IRAs and Other Retirement Plans
Young athletes may not be thinking about retirement, but contributing to an IRA or other qualified plan is an excellent way to reduce the current tax bill. Those amounts may be taxable when withdrawn at a later date, but at a reduced rate when the income level is lower.
FAQs About Taxes on Professional Athletes
There are a few common questions about athletes and taxes that come up:
How Do Pro Athletes Get Taxed?
Athletes are taxed the same as other individuals, based on income levels and the applicable rate. There are no special rates or categories of deductions for athletes, and the jock tax actually adds an additional tax burden for some players. Endorsement earnings can be taxed as business revenue, after expenses.
What Can Professional Athletes Write Off?
Professional athletes have the same access to write-offs as other taxpayers but may have unusually high expenses that lower the tax bill. However, business expense deductions are only available for non-employee income and must be managed separately.
Manage Your Taxes and Ensure Long-Term Wealth
Professional athletes should not attempt to manage their tax strategies independently, as the impact on their finances and future wealth can be pronounced. Players should engage experts who are familiar with effective tax strategies for athletes and can advise a player throughout their career. Premier Sports Network has financial and wealth partners that are a part of our comprehensive approach to athlete care, and are ready to assist athletes in any sport.
Get in touch to learn more about how a tax advisor is invaluable to an athlete’s career in order to maximize net income as well as allocate assets to a retirement and investment plan.
