As a professional athlete with substantial earnings, understanding and managing your tax obligations is crucial. High earnings can lead to big tax bills. Without good tax planning, you might face unexpected financial problems.
You could often earn money from various sources, including salaries, endorsements, and appearance fees. Each of these income streams may have different tax implications. Navigating these complexities requires a strategic approach to tax planning and athlete wealth management.
Understanding the jock tax
Your tax planning can become complicated quickly. One main reason is the “jock tax.” This tax makes you pay taxes in each state and city where you earn money, even if you don’t live there. This means that if you play games in multiple states, you must file income tax returns in each of those states.
Why is this complex taxation in place? Apparently, after the 1991 NBA Finals, California taxed Michael Jordan for income earned during games played in Los Angeles. In response, Illinois created its own jock tax for out-of-state athletes.1 This tax became known as “Michael Jordan’s Revenge.” This incident helped popularize the jock tax, which is now enforced by nearly every state with a professional sports team.
The jock tax can quickly become a complicated and costly issue. This is because of the filing rules in many places each year. They have varying tax rates, deductions, and residency rules. Additionally, you may have increased audit risk from state tax authorities that specifically target athlete filings.
The states can also have conflicting timelines that complicate liquidity planning — how easily and quickly you can access your money — which is important for managing your cash flow.
There are two methods that state use for taxation:
- Duty days method: States calculate the tax based on the number of days you spend working in that state. This includes game days, practice days, and other team-related activities.
- Games played method: States allocate tax based on the number of games you play in that state compared to the total number of games played during the season.
Particularly if you have a national playing schedule, along with endorsement income, keeping up with these obligations is a full-time job — and one mistake can be costly.
Common tax pitfalls
Here are some common pitfalls you could encounter, especially in relation to multi-state taxation and jock taxes:
- Poor record-keeping: Not tracking travel dates, game schedules, and income sources can make it hard to file accurate state returns. Without detailed logs, you may overpay or underpay state taxes.
- Misunderstanding residency rules: Since athletes often live in one state during the off-season and another during the season, failing to establish clear residency can result in double taxation or disputes with state tax authorities.
- Delayed or missed filings: With so many state returns required, it’s easy to miss deadlines or forget filings altogether. This can lead to late fees, interest charges, and reputational damage.
- Overlooking local taxes: Some cities (like New York City or Philadelphia) impose additional taxes on income earned within their jurisdiction. These are often missed without professional oversight.
- Not coordinating with a financial advisor or tax professional: Relying solely on a general accountant or do-it-yourself tax software may not be sufficient. Athletes need a specialized team that understands the nuances of sports income and multi-jurisdictional tax law.
- Ignoring international tax implications: Athletes who play internationally may face foreign tax obligations and need to navigate tax treaties. Without proper planning, this can result in double taxation or compliance issues.
- Failing to plan for retirement and deferred income: Income from endorsements, signing bonuses, and retirement plans can have complex tax implications. Without strategic planning, athletes may face large tax bills later in life.
Tax planning for growing wealth
You might already have or want to create a team of advisors. This team could include an accountant, a financial advisor, and a lawyer on retainer. But if these professionals don’t collaborate, gaps can form. These gaps can lead to missed deductions. They may also cause poor asset allocation and tax strategies that don’t match your long-term financial and investment goals.
The reality is that your financial life connects with other aspects of your life. Without a cohesive strategy, you’re making decisions without the full picture.
- Investment decisions will likely affect your tax liability. Strategies such as long-short offer potential tax benefits.
- Tax strategies can impact liquidity. Without liquid assets, you might have to sell investments or borrow at high interest.
- Cash flow planning influences how you support family, make philanthropic gifts, or invest in private ventures.
Given the complexity of tax obligations, working with a financial advisor to athletes. Ideally, an advisor who operates as a family office. A family office provides a comprehensive suite of services, including tax planning, wealth management, estate planning, and investment management, all managed by a single team.
The bottom line
Dealing with taxes as a professional athlete can be tough. However, with good tax planning and help from a family office, you can handle your taxes well. This lets you focus on your career. You can improve your financial future by understanding how taxes impact your income.
At Mercer Advisors, our family office model allows us to fit the needs of you and your family, through all your wealth stages. We have wealth advisors with experience serving clients who are professional athletes.
Our goal is to amplify and simplify your financial life. We connect the dots of your financial life by unifying financial planning, investment management, tax, estate, insurance, and more. Let’s talk.
