September 5, 2013 : Michael Lankford - Senior Tax Researcher, The Tax Institute
Paying Taxes in Every State!? Taxes & the Pro-Athlete
ED Note: Many people around the country will turn on their TVs tonight to watch the beginning of another NFL season. Those of us watching are likely not thinking about the tax bills that come with all of the fanfare of the games. But for the professional athlete that participates, taxes can be rather complicated.
Do I have to file a U.S. tax return? Do I pay tax on all income if I’m a resident? What kind of deductions can I take? Where do I have to file a tax return? Let’s take a look at just a few of the unique tax issues the professional athlete faces, colloquially known as the jock tax.
Many pro sports have become global over time. Players from all over the world come to play in the U.S. and players from the U.S. play all over the world. Generally, residents of the U.S. must pay U.S. income taxes on all taxable income earned worldwide, while non-residents only pay U.S. tax on income earned in the U.S. Consequently, it’s imperative for the professional golfer to keep taxes in mind whether they are a resident or non-resident of the U.S.
Professional athletes incur many expenses to stay on top of their game; naturally, they want to use these deductions to lower their total income that is subject to tax. Professional athletes are allowed to deduct all of their ordinary and necessary expenses incurred in playing the game to lower their tax bill. Ordinary and necessary expenses for a professional athlete include costs of agents, management companies, equipment, instructors, personal trainers, even sports psychologists. There is no end to the amount of deductions the professional athlete may use to offset taxable income, as long as those expenses are ordinary and necessary to the profession.
Certain travel expenses may even be deducted, including transportation, lodging, and 50% of meals. The general rule is an individual may deduct travel expenses while away from his/her tax home overnight for a temporary business purpose. The key is defining the professional athlete’s tax home. The ‘tax home’ is generally defined as the principal place of business, no matter where their family lives or where they claim to principally reside. An athlete travels on a constant basis and most likely doesn’t have any principal place of business. Thus, the tax home is generally where they spend a majority of their time in the off-season training and preparing for the new season. For example, a player may live in Florida and use this home as their tax home. While they are away from this home playing, they are allowed to deduct the cost to travel to the location, the cost of meals and the cost of lodging.
A professional athlete also participates in frequent charitable events, such as a golf tournament in the off-season, or they may have created a foundation for a cause important to them. The athlete may take a charitable contribution deduction for donations of cash or property to the charity, subject to certain limitations based on the type of charity and the taxpayer’s adjusted gross income. As with all taxpayers, the professional athlete may not deduct the value of his or her time participating in such events. They may only deduct any out-of-pocket expenses associated with participation that directly benefit the charitable organization. For example, the player may deduct certain travel expenses associated with attending the event or the cost of any supplies or equipment used in participating in the event.
Possibly the biggest tax obstacle of the professional athlete is the potential requirement to file a separate state tax return for each state the taxpayer earns income. Each state has its own tax system and tax laws which may or may not require the taxpayer to file a tax return and pay that state’s income tax on the income earned while in the state. On the other hand, some states do not have an income tax (Texas and Florida, for example). Each player must generally pay tax in the state the income is earned. For example, if a Missouri resident plays a game in Wisconsin and receives game day pay, the player will owe income tax to Wisconsin on the earnings from that game — while all other income is not taxed in Wisconsin.
In addition to the earnings in each state, a taxpayer generally must pay tax to his state of residency. Most states subject an individual to a tax on worldwide income if he/she is a resident of such state. Although, the state may grant tax credits or deductions for taxes paid to other states. Consequently, many professional athletes claim residency in Florida due to its lack of a state income tax.
Entity Tax Filings
Some professional athletes may even operate through a state level business entity such as a corporation or limited liability company. The formation of these entities is mostly intended to protect the player’s personal assets from claims arising from the business, but the choice of entity is also comprised of tax advantages and disadvantages of each entity.
For tax purposes, the formation of a single owner limited liability company provides no additional tax issues to consider because the entity may be disregarded under the tax code. On the other hand, the formation of a corporation creates a separate tax entity and raises several more tax consequences in addition to those already discussed. The player has to file separate corporate returns with both the IRS and all relevant states in addition to his/her individual return. They may be subject to double tax if they choose C corporation status, once at the corporate level and once at the individual level. The player must pay himself/herself a reasonable wage from the corporation and file all of the necessary payroll tax reporting documents with the IRS and each associated state. The existence of a corporation may also provide them with additional fringe benefits and retirement plans.
Deduction for tax return preparation
While the professional athlete has numerous additional tax issues to consider which the normal individual doesn’t have to worry about, they are granted some relief: he/she may deduct the fees associated with the preparation all of those numerous and detailed tax returns.