A Tale of Two Pitchers - Withum Sports
It was the best of times; it was the worst of times for New York Met Fans. On December 2, 2022, long-time Met’s pitcher Jacob deGrom signed a 5-year contract worth $185 million with the Texas Rangers. The ace of the Mets pitching staff, who had been a lifelong Met, had decided to head to Texas for what he called a “winning culture” and likely tax savings. After deGrom’s departure, Mets owner Steve Cohen went on a spending spree to bring in players to improve the Mets, signing approx. $500 million worth of contracts. Included in those signings was 3-time Cy Young winning pitcher Justin Verlander, who signed a two-year contract worth $86.66 million. This article is not a discussion of whether the Mets have improved their rotation but a discussion of how the new teams affect the tax situations of the ace pitchers.
We will start with Jacob DeGrom, who is moving from New York, which has one of the highest state tax rates, to Texas. While being a New York Resident, if you are also New York City (NYC) resident, it is the highest rate in the country. Texas, on the other hand, has no state income taxes. For the purposes of this article, we will assume that both players have become residents of their new states. The top tax rate in New York State (NYS) and NYC for 2022 has increased to 14.78% for any taxpayer with an adjusted gross income over $25 million. New York, like most states, has graduated tax brackets, and taxpayers pay a blended rate. DeGrom’s annual salary is $37 million and, therefore, would be in the top NYS tax bracket. A baseball season consists of 162 games, with an equal amount played home and away. DeGrom will, therefore, play a minimum of 81 games in Texas and more if they are playing the Houston Astros. The average top marginal rate for all states is 5.45%. Since half of these games will be played outside of Texas DeGrom’s tax of 5.45% would be approx. $1 million of taxes.
Next, as to the case of Justin Verlander, he is moving from Texas to New York. As in DeGrom’s case, Verlander’s average yearly salary of $43.33 million will qualify for the highest income tax bracket in NYS and NYC. In January, Verlander and his Super Model wife, Kate Upton, purchased a Co-Op for $16.75 million in NYC, and we are assuming they have become full-time residents. While the Mets typically play the New York Yankees, for simplicity, we will assume that half the games are played outside of NYS. Verlander’s state income tax on games played out of NY approx. $1.2 million using the average marginal rate. His NYS and NYC tax will be approx. $3.2 million.
All income earned is subject to tax in your resident state. Certain states, one of which is NY allows for a credit for taxes paid to other states and jurisdictions. This allows residents of those states to avoid double taxation. In Verlander’s case, his net tax to NYS/NYC would be approx. $5.2 million after the benefit of the above credit. In comparison, even though Verlander’s income is substantially more than DeGrom, their net take-home pay is similar.
Many sports contracts are negotiated with state and local taxes taken into account. In addition, other sources of income, such as endorsement and investment income, factor into tax planning. Changing residency, as well as changing your state of employment, adds complications to taxes. Proper planning is required, and taxpayers should consult with a qualified tax professional on residency and employment changes.
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