Professional athletes will need a new game plan for 2018. Pay special attention to these 10 key issues that are unique to sports professionals. Though tax planning opportunities are still plentiful, many business expenses that are common among professional athletes are no longer deductible, or are limited.
Here are some of the issues ahead:
1. Jock Tax: Under the terms of what is commonoly called the “Jock Tax,” athletes must report their income in each state in which they play. An additional challenge from a tax planning standpoint is player trades during the year. We may set up a tax plan, only to have the player traded to a different state or team in which they will play in an entirely different set of states.
2. Residency: Establishing residency can be most challenging for rookie players. Rookies are often young and not established outside of their parents’ home state. Veteran players have the benefit of choosing a permanent residency based on their tax situation. The key is to establish residency in a favorable county near the home stadium or place of play. Establishing residency can be done simply by finding a living space, obtaining a driver’s license in that state and setting up utilities in the player’s name. Many players choose states like Florida, Texas, and Washington that have no state tax requirements.
3. Charitable Giving/Non-profit: Players can take advantage of their status to help others through charitable giving. This allows them to support a cause close to their heart. There is value in maximizing charitable donations.
4. Agent Fees & Unions Dues: As of the tax year 2018, union dues and agency fees directly related to the generation of W-2 income no longer qualifies as an itemized deduction. These once-deductible items will need to be removed from the player’s tax plans moving forward, or different tax structures need to be explored.
5. Player Fines: Nobody wants to see a situation where a player does something to generate a fine against them. The fines are often donated in the name of the player, turning the fine into a tax deductible expense to the player. Fines not donated to a charity may be considered a necessary and ordinary business expense to the player, subject to new and limiting tax rules.
6. Athletic Equipment: Footballs, golf clubs, tennis rackets, racquetball rackets, basketballs, etc. are considered ordinary and necessary for the player to continue to play at a high level, and to maintain their employment with their team. Again, new tax rules cause us to reexamine the nature of this former itemized deduction. Look for professional athletes to start incorporating themselves to take advantage of more favorable tax provisions.
7. Royalties: Royalties can sometimes be a difficult issue with athletes. Most are unsure of the amount due to them through the year, making tax planning for royalty income a difficult task. Royalty deals also come and go based on player performance. A fluctuation in a multi-million dollar royalty deal can really change the outcome of the player’s tax situation.
8. Unknown Increased Salaries: It doesn’t happen all that often, but a veteran player may get sent to the injured list for the season. This means a lower paid backup player will be used to replace the player. Players moving from the bench to a starting position receive a significant increase in pay. This can cause a change in their current tax rate and plan.
9. Signing bonuses: The benefit of a signing bonus all comes down to the form in which the bonus is paid out. If the bonus is paid out properly by the league, it may not need to be included in state income.
10: Taxable Swag: Gifts or swag given to players is not truly a gift and it actually comes with a price tag. The items are almost always given in connection with an appearance or as a bonus for the player’s appearance. Unfortunately, the IRS will want a cut of that swag in the form of a tax payment. These fortunate events create additional taxable income for the players often overlooked in the excitement and lack of notice from the agency providing the swag.
So what’s the score? At Fuoco Group we handle many things in addition to traditional accounting and tax for athletes. Professional sports tends to be seasonal so cash flow management is important too. Since every sport is different, just like every athlete, we can also assist with insurance needs, estate planning, financial services and more. Be a part of our New Financial Dialogue to keep more of what you make in your pocket by reducing your tax liability. Contact Fuoco Group today at 855-534-2727 for a winning season!