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By Ryan Prete
In professional sports, the postseason regularly promises adrenaline-raising action, but for players, there’s huge financial factors often overlooked by fans.
Millions will tune in to the National Basketball Association and National Hockey League playoffs to root for and stress over their favorite teams’ fates. However, there’s a wide array of often-overlooked tax-related implications at play during the late-Spring traditions. Below, Bloomberg Tax breaks these down.
The most prized achievement in any sport is a championship. A sports title comes with many benefits: accolades and celebrations from fans, a rising legacy for the players, making a disregarded city notable again, and, of course, championship rings.
Each title-winning player lands a championship ring made with diamonds, gold, and other precious items. In 2017, the New England Patriots overcame a 28-3 deficit to defeat the Atlanta Falcons 34-28 in Super Bowl LI. To celebrate the unlikely comeback, Patriots owner Robert Kraft had the team’s super bowl rings encrusted with 283 diamonds.
Championship rings in the NBA, NFL, and NHL are normally worth between $15,000-$25,000, according to Sean Packard, tax director at Octagon Financial Services.
Professional athletes pay federal and state income taxes on the rings, but the value of the ring is lumped into a player’s total salary on a player’s yearly Form W2, Packard told Bloomberg Tax.
At this point in their seasons, NBA and NHL playoff teams are well into the conference semifinals round. As for income match-ups, some teams are ahead in the amount of money saved from lower or no state income taxes. U.S. players are subject to the highest federal income tax bracket of 37 percent, while Canadian players face an income tax rate of up to 33 percent.
State Income Tax Match-Ups in the NBA Conference Semifinals:
Winning the Stanley Cup or NBA Championship also comes with a substantial cash bonus for players.
The NBA has a reported $20 million playoff pool. During the 2015-2016 season, the playoff pool was $15 million—$2.66 million of which was awarded to the champion Cleveland Cavaliers, according to SB Nation.
If the championship bonus stays in step with the total playoff pool and increases 25 percent, this year’s championship team could be looking at $3.54 million in bonus cash. Split among a 15-man roster, each player would receive $236,000.
The Golden State Warriors are currently favored to win the 2018 NBA Championship. Federal and California state income taxes alone would deduct over $118,000, or over half, from a Warrior’s championship bonus.
In 2017, the Stanley Cup champion Pittsburgh Penguins were awarded a $4.33 million dollar bonus. An equal split among a 23-man roster translates to $188,261 for each player. Federal and Pennsylvania income taxes would subtract over $75,000 from each player’s bonus.
A treaty between the U.S. and Canada includes provisions that prevent athletes from facing taxes in both countries. The U.S. and Canada are parties to the Income and Capital Tax Treaty, which exempts athletes from facing taxes in both countries.
Ryan Losi, financial adviser and executive vice president at PIASCIK, told Bloomberg Tax in an email that a U.S. citizen who plays for a Canadian team can bypass foreign taxes by declaring “that their permanent residence is in the U.S. (named state) and by actually treating themselves as such (file returns that reflect this).”
Losi said that such players would also have to spend at least half the year in the U.S. as a resident.
Provisions that would normally require the U.S. and Canada to collect taxes on “income derived by a resident of a Contracting State as an athlete” do not apply to “an athlete in respect of his activities as an employee of a team which participates in a league with regularly scheduled games in both Contracting States,” according to Bloomberg Tax.
Every professional athlete is also subject to “jock” taxes, which are calculated by the amount of time a player contributes to “income-related work” in any state that administers an income tax. The time is measured in “duty days.”
The jock tax is calculated by taking the amount of time a player spends in another state and dividing it by the total amount of income-related work days, which start at the beginning of training camp.
States with a sports franchise that don’t administer an income tax—Florida, Washington, Nevada, Tennessee, and Texas—don’t collect a jock tax.
Players receive a tax credit from their home state on jock tax totals to avoid double taxation.
Duty days accumulated during the postseason count toward a player’s 2018 yearly total.
Players are subject to agent fees, which average around 3 percent of a player’s salary, Octagon Financial’s Packard said. High-income individuals making more than $200,000 are subject to a 0.9 percent Medicare surplus tax.
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