Weekly BNA Insights: How Tom Brady Avoids Massachusetts Tax

From the Weekly State Tax Report:

Tom Brady's “Deflategate” suspension and the resulting litigation have provided sports fans across the country with a quick lesson on the laws surrounding collective bargaining agreements. However, those who paid careful attention to the details of the case may have also learned an important lesson about the benefit of tax planning for professional athletes. Specifically, Brady's choice to have a substantial portion of his 2016 compensation paid in the form of a signing bonus not only helped to protect Brady from a loss of income during any suspension imposed by the NFL, but this choice may also have helped reduce the amount of Brady's income subject to Massachusetts personal income tax.

The laws governing the state taxation of signing bonuses paid to professional athletes can create an opportunity for teams based in high-tax states to recruit star athletes while helping those athletes to minimize their state income tax burden. For these reasons, it is important that both teams and athletes (and their representatives) understand the concepts that govern state tax residency for individuals, and how different contractual payment terms will impact the state taxation of nonresident athletes.

Massachusetts imposes a 5.1 percent income tax on all of the income of Massachusetts resident individuals, as well as on the Massachusetts-source income of nonresident individuals, including professional athletes. Massachusetts' relatively high personal income tax rate can make signing a contract with a Massachusetts team less lucrative for a professional athlete who is not a Massachusetts resident than signing an otherwise similar contract with a team in a jurisdiction with a lower state personal income tax rate. However, if a nonresident athlete elects to receive a portion of his compensation in the form of a signing bonus rather than as salary, and the bonus satisfies the three requirements set forth in Massachusetts' tax regulations, then the bonus will not be treated as Massachusetts-source income.

Michael Jacobs and Jason Feingertz of the Reed Smith LLP State Tax Practice discuss the details of Massachusetts athletes’ attempts to avoid state tax in this week’s BNA Insights article, available here (subscription required). Or sign up for a free trial to the Weekly State Tax Report.

Compiled by Melissa Fernley