Paying Taxes on Out-of-State Earnings
Hey athletes! As you progress through your career, you must plan for long-term financial security. Optimizing your tax situation is an essential part of this – in the world of professional sports, no matter what level you perform at, your tax planning should be a core part of your financial outlook.
In this overview, the expert team at TXS Soar will help you understand the complex world of the Jock Tax: what it is, why it matters to you, and what you can (and should) do to ensure you are tax-optimized.
Let's jump right in!
What Is Jock Tax?
In 1991, the Lakers faced the Bulls in the NBA finals, but the basketball court wasn't the only place that LA was taking on Chicago. Tax changes with far-reaching consequences were in the process of being made.
Specifically, the State of California noticed all the money Michael Jordan was making (and taking home with him). Realizing that this was money earned in their state, California imposed a tax on all members of the Bulls team, coaches, and other staff – effectively charging money on earnings generated while playing in LA.
Illinois didn't let this stand and imposed a tax in return. This legislation explicitly states, 'If you tax us, we'll tax you': there is no doubt that the tax was enacted in response to California's actions. In fact, it's still known today as 'Michael Jordan's Revenge' – at least in tax circles.
This is the genesis of the Jock Tax. When you travel the country earning money in different states, some states will demand that you pay taxes to them – rather than just to your home state. While this is based on the actions of sports teams (hence the name), the Jock Tax applies to anyone who earns in multiple states. Since it is expensive and time-consuming for each state to track the income of everyone earning in their jurisdiction, the individuals targeted are typically the more high-profile earners.
Jock taxes are on the books in 21 states, so they will almost definitely affect you at some point in your career.
Why Is Jock Tax So Complicated?
The complications arise because of the various ways in which different states apply the tax. Each state has a different Jock Tax percentage: some, like Florida, D.C., Texas, and Washington, will have 0% Jock Tax, while in others, it will only apply if your home state also has a similar tax. As such, it is not as simple as 'how much did you earn, divided by the number of out-of-home-state games' – each game needs to be addressed individually. It's even more complicated if you switched teams mid-season.
Other paid aspects of your career also need to be taken into account, including:
- Signings/fan events
- Promotional work
- Training sessions
- Local endorsements
An important thing to note is that national or international brand deals (sneakers, for example) that you negotiated do not count (at least not for Jock Tax).
How Is Jock Tax Calculated?
The simplest method for calculating Jock Tax, which many states use, is the 'Duty Day' method. You divide your annual salary by the number of days you were on duty in the state. The resulting figure is then used in conjunction with the specific state's income tax rate to calculate your liability.
The penalties for incorrectly paying your taxes can be substantial, so you need to make sure that your affairs are in order: speak to your money manager to make sure that (among other things) your Jock Tax is being dealt with by a tried and tested expert.
Another critical step you need to take is record-keeping. Having a clear, traceable trail of where and when you earned money throughout the year will be invaluable when it comes to tax time – keep all your receipts, travel costs, and other expenses organized, and the process will be easier (and more financially beneficial) for you.
TXS Soar provides a range of services (including tax optimization) for all your finance needs: we specialize in working with professional athletes, and you can rely on us to get you where you need to be.