The running joke went like this: Donald Trump was so upset over kneeling NFL players and the rebukes from LeBron James and the Golden State Warriors, that he took revenge on athletes via the new tax plan. For millionaire sports stars, the decline in their marginal rate—from 39.6 to 37%—would be offset by eliminating the deductions on everything from training expenses to union dues to agent commission.
The reality is somewhat more complex. High-earning athletes are dramatically impacted by the new tax bill. But it all depends on where their team plays and where they live. If location, location, location represents the three most important words in real estate, it doubles as the slogan for tax implications.
I run Goldstick Tax Services, an LLC in Scottsdale, Arizona. I have been doing tax work for athletes for over 20 years. My clients include more than 50 pro athletes and coaches. As I considered the new tax bill, I considered a hypothetical NBA player who makes $10 million per year and realized something: the new $10,000 cap on state income tax deduction is critical. An athlete living in a state with a high state income tax—e.g. California—is markedly worse off, and now takes home less than half of his $10 million. If, however that same player were to be traded and relocate to a state with no or low state income tax—e.g. Florida or Texas—even at the same salary, his after-tax income would go up by as much as 10%.
Professional athletes will also not be able to deduct their agent fees, union dues, offseason training expenses, tax preparation fees or financial management fees as of Jan. 1, 2018.
Below is a comparison of the $10 million NBA player’s tax bill from 2017 to 2018, as well as a comparison between the tax bill as a California resident versus the bill were an athlete to play for a team located in Florida, Tennessee, Texas or Washington.
Note: Income assumptions: NBA gross compensation ($10M), 401K deduction ($18K), Marketing/Endorsement Income ($50K), NBA royalties ($60K) and investments ($30K). Deduction assumptions: Agent fees ($400K), offseason training ($50K), union dues ($15K), tax preparation fees ($6K) and state income ($1.2M in California and $100K in other states).
• Will players now request or demand agents who reduce their fees from 4% to a lesser percentage or make the players whole—that is, to account for the fact that agent fees are no longer tax deductible? This will be interesting to watch.
• Most players receive around $60,000 annually from the National Basketball Players Association in licensing from jerseys and trading cards.
• A player like LeBron can spend upwards of six figures in training, most if it incurred in the offseason. If this adds one season to his career, it’s money well-spent (especially when 40% could be written off.) But as of 2018, those expenses will no longer be able to be written off.
• Yes, union dues are $15,000 per player. A big chunk of change. But consider that the NBA median salary exceeds $6 million.
(Editor's note: The first table originally had a graphic error which has since been corrected.)