Professional athletes get a lot of glory, not to mention salaries that range from healthy to obscene, and all for doing what they love. It's one thing to envy their wealth, but when it comes time to file taxes, be glad you're not one of them.
Pro athletes are the guys who put the gleam in the eyes of tax authorities everywhere. Unlike a business person who can slip unnoticed into a state, do a deal, and slip out again, the athlete's work schedule is on the nightly news. You can bet when the NFL comes to town, the local taxmen hear the cha-ching of new tax revenue.
Thanks to the jock tax, an NFL player can easily file a bumper crop of tax returns before he's through. The average salary of NFL players this year is close to $2 million. With thirty-two teams and up to fifty-three players (on game day), the taxable income adds up pretty quickly.
State Tax, City Tax, and Elsewhere
Twenty-two states and the District of Columbia have NFL teams, eighteen of which charge state income taxes. Then there are nine cities that charge taxes of their own. No player will file the maximum number of returns since none of them will play in every state. Even so, a guy who lives in one state (with a state income tax) and plays for a team in another state, can easily end up filing one federal return, a stack of state returns, plus several city returns.
This year, two NFL games were played in London, where the top tax rate is 45 percent. Players will receive a foreign tax credit against the amount paid in the United Kingdom, but only up to the top tax rate in the United States, which is 39.6 percent. One of the teams that traveled to England to play against the Jaguars was California's San Francisco 49ers. California has the dubious distinction of charging the highest personal income tax rate, now 13.3 percent. This means whatever salaries the 49ers earn will be reduced by roughly 60 percent in combined taxes (45 percent to the United Kingdom, 13.3 percent to the state of California, and 1.45 percent federal Medicare tax). Ouch!
Jock Tax Explained
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 an injured player who travels with the team has to pay jock tax, whether he practices with the team or not.
Generally jock tax is determined this way. Let's say a quarterback earns the average of $3.84 million in 2013 and is deemed to have worked 200 to 210 duty days over the course of the year, not counting the playoffs. 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.
Tennessee doesn't have state income tax, but it has what's known as a "privilege tax", which is a flat rate of $2,500 per game charged to professional athletes who play in Tennessee (regardless of income, up to three games for a maximum of $7,500 per year). NFL players, however, aren't charged this privilege tax on NFL income, whether they're Tennessee residents or visiting teams.
In California, which has three NFL teams – the San Diego Chargers, the San Francisco 49ers, and the Oakland Raiders – 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), NFL players who were California residents paid more than $24 million to their own state tax coffers. And visiting NFL players paid in close to another $16.4 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 highest state income tax rate was raised to 13.3 percent, retroactive to the beginning of the year.
Of course, not every state followed California's policy of raising personal taxes. Wisconsin, for example, dropped its top tax rate from 7.75 percent to 7.65 percent for 2013. That's a sweet deal for Green Bay Packer quarterback Aaron Rodgers. With total compensation from the Packers of $40 million in 2013, the tax rate reduction will save him a cool $40,000 in state tax, without lifting a finger.
Tax Authorities See Stars
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. For most of these sports stars, that means a stack of tax returns that's not for the fainthearted and definitely not for the novice.
CPA Robert A. Raiola sees it this way: "Players don't always know which states they have to file in and which they don't. They may not understand the credits they're entitled to, depending on where they reside and what reciprocity laws are in force." 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 puzzle that needs to be assembled by a professional. Otherwise, taxes may be overpaid or overlooked and credits may be lost", 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.