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By Ryan Prete
National Basketball Association athletes are paying more in taxes than ever before in the era of super-teams and super-contracts.
As the NBA season tips off Oct. 17, Bloomberg Tax analyzed the top five highest-paid players, in addition to James Harden—who last summer signed the richest contract extension in NBA history at $170 million—and Russell Westbrook—the reigning league MVP who holds the largest total contract salary in NBA history, valued at $233 million:
Geoffrey Marsh, financial adviser at the McLean, Va.-based sports agency Octagon Financial Services, told Bloomberg Tax that he receives a multitude of calls from players who question the size of their paychecks after taxes.
“Especially with rookies, I get these calls from players whose minds are blown when they take a peek at their first pay stub,” Marsh said. “Many calls are from athletes who aren’t aware of the taxes they are subject to and think they’ll be getting paid the full amount of their agreed upon salary.”
NBA salaries are ever-expanding. This season, three players hold salaries over $30 million. By next season, eight players will have salaries over $30 million. In the 2019-2020 season, Stephen Curry will become the first NBA player to hold a $40 million salary.
However, Ryan Losi, financial adviser and executive vice president at PIASCIK, an accounting firm that works with athletes, told Bloomberg Tax that many players are blindsided by their tax burden.
“After I explain to a player the tax bracket they fall under, they often stop me and ask ‘Wow, so this is really what’s getting taken from me?’” Losi said. “I’ve had a handful of basketball players tell me they’re switching political parties after realizing the amount of taxes they have to pay.”
For athletes especially, a continuing knowledge of tax burdens is crucial to fiscal well-being, Losi added.
“These guys have to be aware of what’s going on and understand that there are people and resources to help them, because we aren’t talking about 15 or 20 percent of a person’s salary here—it’s far beyond that,” he said.
Marsh also said that taxes do fit a “piece of the puzzle” for athletes in choosing where to land during free agency. Marsh referenced at least one client who chose to play in a income tax-free state in large part because of the benefit to his wallet.
The largest slice of the tax pie comes from federal income tax, where each player is subject to the highest tax bracket of 39.6 percent.
With state income taxes, varying rates mean a different tax bill for each player. Stephen Curry and Blake Griffin both play for California-based teams and are subject to a 13.3 percent income tax—the highest in the U.S.—which swipes millions from each player’s salary.
James Harden resides in Texas, one of seven states with no income tax. Harden’s net pay significantly increases by dodging a state income tax. Of the seven athletes analyzed, Harden is the only one who nets more than 50 percent of his original salary.
Gordon Hayward could face an extra blow to his wallet by residing in Massachusetts, where voters are expected next year to consider a “Millionaires Tax” that would impose a 4 percent surtax on individuals making more than $1 million annually. Hayward landed in Massachusetts this past summer, inking a four-year, $128 million deal with the Boston Celtics.
Every professional athlete pays jock taxes, which are calculated by the amount of days a player contributes to “income-related work” in a state administering an income tax. Each of the NBA players analyzed faces a jock tax bill of hundreds of thousands of dollars.
Days spent in foreign jurisdictions are called “duty days” and are counted on the first day of NBA training camp by every state except Arizona, which begins counting duty days on the first day of the regular season—making the state especially attractive for off-season practices and programs.
For the 2017-2018 regular season, 292 to 293 duty days are counted, depending on the opening day of training camps—96 of the duty days come from games played after Jan. 1, 2017, which carry over from the previous season. A team spends one duty day in a state per away game.
The single duty day is divided by the total number of duty days, allowing states the ability to take 0.34 percent of a player’s total salary.
LeBron James pays over $400,000 in jock taxes after playing in California, Minnesota, Oregon, and New York—states with exceptionally high income tax rates—20 times during his 293 duty days. Curry resides in California, a state with four total NBA teams. Because he plays out-of-state less often, he is subject to a much smaller jock tax bill.
The NBA, like the National Hockey League, has an escrow deferment system to ensure that players obtain the agreed upon 51 percent of total league revenue.
Ten percent of each player’s salary is deducted for the escrow account and is returned to the player, after taxes, the following season. Because the escrow return is based on the player’s salary the previous year, the returns can be small. Curry grossed just more than $12 million last year, therefore contributing about $1.2 million to the escrow account.
Each player receives 24 paychecks per season, according to Marsh, and the escrow deductions are present on 12 of them.
If the player’s share of revenue falls short of the agreed upon 51 percent, the league contributes the necessary additional money to the athletes, known as a shortfall.
For the 2016-2017 season, every player received an additional $355,449 in shortfall money, according to Marsh, who expects the 2017-2018 season to result in another shortfall bonus.
Players also face an agent fee, which averages around 3 percent of a player’s salary, according to Marsh.
To contact the reporter on this story: Ryan Prete in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jennifer McLoughlin at email@example.com
Copyright © 2017 Tax Management Inc. All Rights Reserved.
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