UPDATE: Reciprocity Tax Laws
Smart tax professionals who are aware of existing reciprocity laws can save professional athletes a bundle in taxes they don't really owe. For example, Pennsylvania residents are exempt from paying taxes on money they earned in New Jersey, West Virginia, Ohio, Maryland, Virginia, and Indiana. So, when the Steelers play in Cleveland, they're exempt from Ohio state income tax. Even so, teams aren't always aware of the reciprocity laws and may still report income earned in that state and withhold state income taxes. That's why players have to rely on their tax advisors to know where reciprocity laws exist . . . and get it right.
By Teresa Ambord
Sure there's a lot of glory in being a big-shot athlete. But don't envy these guys come April 15. Where most of us have a couple of tax returns to file each year, pro athletes are the taxpayers who put the sparkle in the eyes of tax authorities all over the country. Their giant salaries and high-profile schedules make it hard for them to hide. And in an economy where most cities and states are looking for ways to fill their coffers, you can bet these easy targets will not escape the notice of the Tax Men. Thanks to the "jock tax," an athlete, for example, a pitcher on a Major League Baseball (MLB) team, can easily file over a dozen returns before he's through.
According to the Major League Baseball Players Association, the average salary of an MLB player rose to $3.2 million in 2012 for roughly 750 players on thirty teams (that's about $2.4 billion in taxable income).
Seventeen states have MLB teams, fourteen of which charge state income taxes. Then there are six cities that charge taxes of their own. There's one saving grace . . . players who travel to Canada to play against the Blue Jays aren't subject to Canadian tax because of treaty protection. Of course, not every player plays in every state, so it's unlikely anyone will file the maximum number of returns. But if he did, worst-case scenario, a guy who lives in one state (with a state tax) and plays for a team in another state, could end up filing one federal return, fourteen or fifteen state returns, and several city returns.
Alex Rodriguez's "Taxing" Recovery
Yankee third baseman "A-Rod," Alex Rodriguez, sat out spring training in his New York apartment. In January, he underwent arthroscopic hip surgery, which means he'll be grounded for at least six months, keeping him out of the game until after the All-Star break. But his salary of $114 million over the next five seasons rolls on. So does his tax liability.
Meanwhile, his team just completed spring training in Florida. A-Rod could have chosen to go along as an observer and saved himself a bundle of tax just by recuperating in Tampa instead of at home. The thing about the jock tax is, whether you play or not, if you travel with the team, you pay the tax in force wherever you are. Florida has no state income tax, so for those duty days (forty-five this year) spent watching his team train, he wouldn't have owed state income tax.
The tax problem could get worse. Players for the New York Yankees may be deemed New York state/city residents. According to the statutory residence test (SRT), individuals who spend more than 183 days in the state are residents, subject to New York's high personal income tax rates on all income, including endorsements. Worse still, if they live in New York City, they also pay the city's local tax charged to residents – not to visiting team players – of another 3.625 percent.
A-Rod's handlers are no doubt keeping a close eye on the status of his residency as it relates to taxes. As it is, the decision to recover at home in his recliner is going to cost him. The question of how much it will cost in taxes will become clearer as the season progresses.
The jock tax is calculated by the number of "duty days" a player spends in a game function, such as practice, training, playing, or meeting, beginning with spring training and ending on the last day of the season, including playoffs. Even injured players who travel with the team – for example, New York Yankee third baseman Alex Rodriguez – still have to pay the same jock tax whether they play or not (see sidebar).
The actual number of duty days varies with the position on the team, a team's success, and how the post-season goes. Pitchers and catchers, for example, arrive earlier for spring training than many of the others on the team.
If the pitcher earned the average of $3.2 million in 2012 and is deemed to have worked 183 days over the course of the year, his salary will be attributed to each state by the number of days worked there. At tax time, therefore, each state gets its share of his tax liability. You can see why these states love the jock tax. Not only do the games themselves bring revenue, but the visiting players spend their own money while they're there and, on top of that, they owe taxes for the privilege of playing in those states and also in certain cities. It's a sweet deal . . . unless you're the taxpayer.
In California, which has five MLB teams – the Angels, the Dodgers, the Athletics, the Giants, and the Padres – duty days and taxable income add up fast. In 2010 alone (the last year for which figures are available from the California Franchise Tax Board), MLB players who were California residents paid nearly $29 million to their own state tax coffers. And visiting MLB players paid in close to another $31 million in jock tax.
If you consider all professional sports – and California is a haven for pro sports – in the same year, the state tax authorities collected a total of $171.7 million in tax revenue, more than $70 million of which was attributable to jock tax from visiting athletes. Mind you, that was prior to the recent round of tax hikes in the Golden State. In fall of 2012, California's state income tax rate was raised to 13.3 percent, retroactive to the beginning of the year.
Generally, businesspeople can slip in and out of a state doing deals, promoting their companies, making money. Their schedules may be of primary importance to their own families, but unlike sports stars, they manage to slip under the radar of the tax authorities without even trying. So whether their activities while traveling are taxable or not, the anonymity makes enforcement a problem. Sports stars, on the other hand, have their schedules plastered all over the nightly news.
With states and municipalities all over the country seeing their budgets go from black to red, you can bet the tax authorities are going to go after easy targets like pro athletes.
CPA Robert A. Raiola
sees it this way: "It's a matter of assembling the tax puzzle to figure which share each state gets and making sure the athlete gets the credits he's due." Raiola heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC
. "Figuring out the jock tax is a complex job that should be left to professionals," he added.
Regardless, it's unlikely that anyone is going to shed a tear for the plight of the pro athlete with a multimillion-dollar contract and the potential to make much more in endorsements and other fees. But maybe we can at least have a little sympathy on April 15 for the guy who's up to his ears in tax returns.
For more about professional athletes and the state income tax they pay, see our previous article: Which Sports Team Is Less "Taxing" for Free Agents?