Breaking Down the “Jock Tax”

February 04, 2016 : Brittany Benson – The Tax Institute

While professional sports players are focused on training and performance, they might also need a little help in regards to taxes.

Many states and large cities levy a “jock tax” on professional athlete income. That includes taxing the value of humongous championship rings, salaries and bonuses.

In fact, local and state taxes have a significant impact on a professional athlete’s life. Where they live, play, and how much the team can afford to pay them are directly impacted by state jock taxes.

How does jock tax 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 don’t 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 an 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.

And 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 on jock tax

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. Recently, 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

According to a Department of Labor study, Florida is home 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 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 the federal tax deadline.

In closing…

So when you see a new professional sports player signing a multi-million dollar contract, take some comfort in knowing that his tax returns are fairly complicated and they may lose a significant chunk of their pay when they plays in states other than their state of residence, even if that residence is a mega-mansion full of shiny trophies.

Whether you are a professional sports star or not, get tax help! Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you get back the most money possible.

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Brittany Benson – The Tax Institute

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