Celebrating Super Bowl 50 and Breaking Down the “Jock Tax”
It’s the final countdown. Super Bowl 50 is in just a few more days. It will be played on Sunday, Feb. 7 in Santa Clara, California.
While the players are focused on their training and performance, they will also need a little help in regards to taxes. California is among many states and large cities that levy a “jock tax” on professional athlete income. That includes taxing the value of those humongous championship rings and Super Bowl winners’ bonuses.
State and local taxes have a significant impact on a professional athlete’s life. Where they live, where they play and how much the team can afford to pay them are directly impacted by state jock taxes.
How do jock taxes work?
Generally, a state taxes all income earned by residents of the state. Other states may only tax nonresident income earned in that other state.
States with jock tax laws do not tax nonresident athletes at a higher tax rate; rather, jock taxes affect the amount of an athlete’s income that is subject to state or local taxes. Think of your annual salary as a pie; each state where you worked is trying to get the largest slice they can in order to charge you more in state taxes.
In addition to their annual base salary, performance and signing bonuses are included in a player’s income pie if the conditions to receive the bonuses were met or partially met while performing services in that state. Before you shed too many tears for Peyton Manning and Tom Brady’s bank accounts, note that endorsement income is not subject to tax in states outside of where they live.
Michael Jordan’s revenge
Jock taxes are not a new concept; the first were introduced in the 1960s. But the rise of its modern-day application is directly linked to the 1991 NBA Championship and the now-famous Illinois tax law known as “Michael Jordan’s revenge.”
After the confetti settled on Jordan’s NBA championship debut and the Bulls’ famous dethroning of the LA Lakers, the State of California informed Jordan that he would owe state taxes for the days he spent in Los Angeles. In direct response to the California policy, the State of Illinois announced that it would levy a jock tax on athletes from any state that imposed the tax on their athletes. Today, almost every state and many large municipalities (including Kansas City, Pittsburg and Detroit) that host professional sports teams has enacted a jock tax policy.
The jock tax does have its limits. Earlier this year, the Cleveland, Ohio, jock tax was sacked by the Ohio Supreme Court when two retired NFL players successfully claimed that the city was disproportionately taxing visiting team’s players by using a formula that gave its residents preferential treatment.
Why athletes live in Florida
The only states where NFL teams are located that don’t have a state income tax are Florida, Tennessee, Texas and Washington, giving teams in those states a home-field tax advantage for recruiting players and keeping them. According to a Department of Labor study published in May 2014, Florida is home to five times more professional athletes than any other state. Besides being one of the only U.S. states with year-round outdoor training weather, Florida lets the athlete keep all of the income for days played in the state. But remember that all of those away games are still likely to cause an interstate taxation headache come April.
So when you see a new NFL player signing a multi-million dollar contract, take some comfort in knowing that his tax returns are fairly complicated and he may lose a significant chunk of his pay when he plays in states other than his state of residence, even if that residence is a mega-mansion full of shiny trophies.
Learn more on how taxes impact a bonus you received from your employer from the tax experts at H&R Block.
For teenagers filing taxes due to picking up part-time seasonal work, learn the the top things you need to know at H&R Block.
Not sure if you have to pay taxes on your scholarship? It depends on how the scholarship money is used. Learn more with the tax experts at H&R Block.
Does your job pay cash without withholding taxes? Learn how to pay income tax with cash wages at H&R Block.