May 14th 2013
By Teresa Ambord
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Nobody wants to come in second instead of first. But depending on how the pieces of the tax puzzle fit together, second place could be a lot more profitable. Take a look at this recent scenario in which the number two draft choice netted well over a quarter million dollars more than the number one.
With the NFL draft recently completed, the first pick went to the Kansas City Chiefs, who tapped Eric Fisher, offensive tackle from Central Michigan. Being the number one choice comes with an honor reflected in the size of the bonus. Naturally, Fisher's bonus is the biggest. But when the taxman gets through with him, how will his bonus stack up to the number two pick? It's largely a function of geography.
Number One vs. Number Two
Fisher's total compensation is sweetened by a signing bonus of $14,518,544 from the Missouri-based team. If he becomes a Missouri resident, all his income will become subject to a hefty state income tax of 6 percent, plus Kansas City's local tax of 1 percent.
The number two pick was offensive tackle was Luke Joeckel from Texas A&M. He was drafted by Florida's Jacksonville Jaguars. As number two, his signing bonus was lower than Fisher's by a whopping $719,200. Florida, of course, charges no state income tax, so if Joeckel opts to become a Florida resident, he'll pay zero state income tax to Florida. However, he'll still be subject to jock tax on some of the team's road games. Jock tax is determined by the percentage of duty days played in each state that charges the tax, multiplied by a player's salary.
What's the bottom line difference? Robert Raiola, CPA, @SportsTaxMan on Twitter, ran the numbers. Raiola heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.
Using figures from the following chart provided by Spotrac (a great source of athlete contract information), Raiola estimates that Fisher will pay approximately $1,042,000 in state and local income tax alone on his first-year compensation. After paying a combination of federal, state, and city taxes, he'll be left with roughly $8.1 million.
Then there's Joeckel. To recap, as a Florida resident, he'll pay no state income tax (but will pay jock tax of approximately $99,000). For his first year with the Jaguars, he'll bank approximately $8.4 million, or roughly $284,000 more than Fisher, the number-one pick.
Moving on to the Third Pick
Dion Jordan, offensive tackle from the University of Oregon, was picked up by the Miami Dolphins (after the Oakland Raiders traded away their right to make the third pick). His projected bonus is $13,341,672, which is about $1.8 million less than Fisher's. If Jordan becomes a Florida resident, like Joeckel, he'll owe no state tax on his income but will pay jock tax to some states. Had he been chosen by the Raiders, a California team, his income would be subject to the highest state income tax in the nation. In the end, he's still in a sunny coastal state, but in terms of his overall tax picture, he may have dodged a huge bullet on his year-one compensation.
The differences in taxes paid and net incomes are jaw dropping, especially in light of the ranking. But chances are at this point, not one of these young rookies is shedding too many tears over the comparisons. Here's hoping they learn from the financial fiascoes of their predecessors, in the NFL:
- No hiring the out-of-work brother-in-law (or unscrupulous manager) to manage the money.
- No failure to render unto Caesar what is Caesar's.
- No mindless spending sprees that can turn a fortune into a bankruptcy in the blink of an eye.
Wealthy athletes going broke are becoming cliché. If their mamas didn't tell them, maybe the bankruptcy judge will. In the end, it's not what you make, it's what you save.