Jan 28th 2014
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Clayton Kershaw just signed a record breaking deal with the Los Angeles Dodgers. So his primary workplace will be southern California, but he’s keeping his Texas address, more than 1,400 miles east. That may have something to do with family issues and the pride of being a Texan. But it’s also a smart money move.
His seven-year, $215 million deal with the Dodgers includes an $18 million signing bonus. That deal set a new record for pitchers in the MLB. Kershaw is a two-time Cy Young Award winner, and at age twenty-five, he has a lot of good years to give.
Chances are, he also has an astute financial adviser. By remaining a Texas resident, Kershaw will bank a lot more of that hefty salary than he would if he changed his residency to California.
Here’s how this breaks down…Texas has no state income tax. California has the nation’s highest state income tax, maxing out at 13.3 percent. The calculation is complex, but one tax specialist says over the life of his contract, Kershaw will save nearly $6.5 million by remaining a Texas resident.
CPA Robert Raiola is the sports and entertainment senior group manager in the Cranford, New Jersey, office of O’Connor Davies, LLP. He ran the numbers, showing how much tax Kershaw would pay as a California resident as opposed to being a Texas resident.
Raiola’s chart below shows the contrast (forgive the squeezed digits). The contract income is broken down year by year.
If Kershaw became a California resident, in seven years he would pay 13.3 percent in state income tax alone, which comes to approximately $26,274,220, said Raiola. He’ll also get a partial deduction on his federal income tax for the state tax paid, reducing his overall tax bill.
However, as a Texas resident, his state tax bill would be a fraction of that. Of course he will owe zero to Texas, which has no state tax. But he will owe nonresident tax on the income earned in California, of about $11,683,189 plus nonresident tax to other states which charge personal income tax of $3,861,220, for a total of $15,544,409. The difference at the end of the contract is $10,729,811 in state taxes saved as a Texas resident.
There are other factors, added Raiola. If he were a California resident, he would get a larger deduction on his federal tax return and a credit on his California tax return for taxes paid to other states, and yet the outcome as a Texas resident is still much greener.
Over the life of the seven year contract, with all elements combined the savings comes out to approximately $6,483,484. Not bad! It does mean Kershaw will have to be aware of how many days he spends in California or he could be deemed an accidental resident.