The headlines were tough to ignore this summer. Carmelo Anthony re-signed with the Knicks for $122 million. Kevin Durant reportedly inked a deal with Nike that could be worth $300 million. And even in these late stages of free agency, Eric Bledsoe reeled in a $70 million contract with the Suns.
High-profile negotiations can dominate the conversation when it comes to player finances. But sometimes we lose sight of the other factors baked into how players manage their balance sheets. While it's easy to assume all NBA players have hit the big time, managing money properly can be a challenge for rookies settling into the league.
Take the NBA's reigning Rookie of the Year, Michael Carter-Williams, for example. As the No. 11 pick in the 2013 NBA draft, Carter-Williams signed a deal that would pay him $4.5 million over his first two seasons, only a fraction of what Anthony will make over that period. And after watching so many NBA greats over the years waste their fortunes, preemptive measures are being taken to keep Carter-Williams' rookie salary. The Philadelphia Inquirer reported last year that his salary was deposited in a trust fund that he can’t tap into for three years. In the meantime, Carter-Williams is living off his endorsement deals. Extreme provisions like this take the question of financial restraint out of the player’s hands altogether -- but also show that not every NBA player is living a lavish life.
In a similar vein, Klay Thompson’s father, Mychal (a former NBA great), was once believed to have some control over Klay’s finances (the Warrior stands to make $3 million this season). After Thompson was involved in an altercation with Indiana Pacers players last February, Mychal indicated that Klay’s allowance that week was going to take a hit. “He will [figure it out] when he sees that cash envelope show up a little short this week,” Mychal said on ESPN Radio. Thompson later said the he thought the whole ordeal was “just funny” and that his dad has “always been a joker.”
But while Carter-Williams and Thompson have people looking out for their finances, there's another person also dipping into their pockets: Uncle Sam.
Though a host of factors can impact players' net salaries, one of the most overlooked variables are taxes. Compensation is based, more or less, on performance -- but it's also based on location.
In addition to the federal government, some states and cities tax players’ incomes. This varies on a wide scale. Players on the Rockets, Spurs and Mavericks, for instance, are not required to pay Texas state income taxes assuming they are residents of Texas, a non-taxing jurisdiction. (This changes for away games with the so-called “jock tax”; more on that below). Contrast that to the California-based Lakers, Kings, Warriors and Clippers, where player salaries are taxed 13.3 percent, the highest individual income tax rate in the country. While it might not occur to fans that players are taking pay cuts based on where they play, it's a real factor that everyone in the league is aware of. Below is a map showing the highest individual income tax rates by state.
There are 22 teams that play in states that enforce income taxes and four teams playing in cities with income taxes, according to Robert Raiola, a senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP. However, there can be complications when teams play in different cities than they practice.
Players can also be taxed for traveling to different states and cities for away games. The jock tax is determined based on a calculation of “duty days” or “games played,” the subject of lawsuits brought by former NFL players Jeff Saturday and Hunter Hillenmeyer and set to be heard by the Ohio Supreme Court. (There was a new development in Hillenmeyer’s case on Wednesday).
In Tennessee, there is no jock tax, but NBA players are stuck with an occupational privilege tax of $2,500 per game (limit three), while NHL players in the state were exempted from the tax in May (NBA players will also be exempted on June 1, 2016). For NBA players, an ideal road trip for tax purposes would include four of the five teams from the Southwest Division. Only one team from that division, the New Orleans Pelicans, plays in a state that imposes a jock tax.
The basic idea is that states are targeting high-income earners for spending time within their borders, making NBA players the perfect targets. The jock tax, along with a three percent rise in the individual income tax rate mentioned above, contributed to California collecting a whopping $216.8 million in tax revenue from professional athletes in 2012, according to data obtained by Raiola and SI.com’s Michael McCann.
Tax implications often get lost in discussions about players’ free agency moves. Cap space, championship viability, organizational stability and other factors tend to consume the bulk of the attention. Yet taxes can often make a huge difference for the salaries of players who decide to change teams. Consider Knicks star forward Carmelo Anthony. Before Anthony signed a blockbuster contract to remain in New York this summer, SI.com examined how much money he likely would have earned with several teams.
Anthony maximized his compensation by re-signing with the Knicks, which owns his bird rights, a provision in the league’s Collective Bargaining Agreement enabling incumbent teams to sign qualified players to contracts of longer duration with larger annual increases. Had Anthony signed for the maximum of about $129 million, SI.com projected that over the five years of the deal Anthony would have netted a salary of approximately $66.7 million, with more than $46 million going to federal taxes and more than $16.3 million to state and city taxes.
If Anthony chose to join the Bulls – a plausible option at one point, according to reports – his gross salary over four years was projected to be around $95.9 million. After state and federal taxes, his salary would have netted approximately $53.9 million
Of course, before even becoming eligible to sign a maximum contract, many players enter the league in need of guidance on how to handle the relative windfall provided by their much smaller, rookie-scale deals. At the NBA’s Rookie Transition Program, players are presented with advice on how to manage their finances. One page of material distributed to players lists the following five bullet points:
- Don’t try to go it alone. Make sure you have an appropriate financial team in place.
- Don’t give someone power of attorney over your finances. Have your say in all financial decisions.
- Don’t borrow without first developing a plan for how you’ll pay it back. Manage your credit wisely so you don’t overextend yourself.
- Don’t co-sign for a loan. Not only could you end up responsible for the loan, but you could also have your credit ruined in the process.
- Don’t complete Form W-4 without first speaking with a tax advisor. Make sure your tax withholding is appropriate.
In addition to those points, players at this year’s program were instructed to recite the phrase “I don’t want to go broke,” according to Sarah Lyall of The New York Times. The phrase, which reportedly turned into a chant, calls to mind the numerous tales of former NBA players who have fallen on hard financial times, from Antoine Walker to Kenny Anderson to Eddy Curry.
Walker, who filed for bankruptcy in May 2010, earned nearly $110 million in salary over his 13-year career. A 2009 SI story explained, based on information collected from sources, that Walker's financial problems are far from uncommon for NBA players, with reasons ranging from unsound investments to paternity obligations to reckless spending to sheer poor decision-making.
As many former NBA players can attest, financial management requires a delicate hand. One of the slogans handed down by the NBA to rookies sums it up: “Being an NBA player means life-changing financial decisions."
Robert Raiola contributed to this story.