Celebrating Super Bowl 50 and Breaking Down the “Jock Tax”

February 04, 2016 : Brittany Benson – The Tax Institute

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.

Conclusion

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.

Related Topics

Related Resources

Deferred Compensation Isn’t Just for Pro Athletes and CEOs…

Join H&R Block as we dig into the the mystery of deferred compensation plans for everyday people and the ultra-wealthy.

Reporting Taxes on Tip Income

Learn how you should report the tips you received on your taxes.

Taxes in the Gig Economy

The gig economy and taxes go hand-in-hand. If gig work is your primary form of income, review these important tax tips from our H&R Block tax professionals.

I would like to get wage and income transcript information. I need a list of all the income I earned last year — Can I

Do you need to get a copy of your wage and income transcript from the IRS? Learn more from the tax experts at H&R Block.

Brittany Benson – The Tax Institute