MLB Trade Deadline Winners And Losers: The Tax Edition Aug 5th 2013, 02:33
HOUSTON,TX- APRIL 9 : Pitcher Bud Norris #20 of the Houston Astros delivers a pitch in the first inning against the Florida Marlins in a MLB baseball game on April 9, 2011 at Minute Maid Park in Houston, Texas. The Marlins won 4 to 3. (Image credit: Getty Images via @daylife)
The 2013 MLB trade deadline has come and gone, and while many of the big names that were rumored to be on the block stayed put (see Lee, Cliff), there were some deals made, and for those guys who were traded, the next few days are fraught with challenges, as they find themselves thrust into a playoff race while simultaneously trying to adjust to new teammates, cities, and PED peddlers.
With so much going on, it would be easy for a traded player to ignore the state tax implications of his sudden move. That's why I've put together this little Winners and Losers of the Trade Deadline: The Tax Edition.
But first, a primer on the manner in which professional baseball players are taxed from a state perspective.
Baseball players, like all taxpayers, have a state of residency. This state of residency may or may not be the state in which the player's team is located; for example, a player could conceivably play for the New York Yankees but establish Florida as his state of residency.
The state of residency is critical because a baseball player, like any other taxpayer, must pay tax on all of his income, wherever earned, to his state of residency. If an athlete calls a state with no income tax like Florida or Texas home — as many do — no tax will be paid on their income to the state of residency.
Of course, baseball players also spend upwards of 100 days a year on the road, and pursuant to the "jock tax" most states currently have in place, players are required to allocate income to the states in which they play games and to pay the corresponding income tax. It's a win-win for the taxing states, as they collect additional tax revenue that can be used to fund in-state programs without having to deal with the unpopular political move of raising tax on its residents.
Now, this may seem patently unfair, as it would appear that if a player lives in New York but plays a game in California, the income earned from that game would be taxed twice: once to the state of residency – New York — and once when allocated to California under the jock tax rules. Double taxation is generally avoided, however, by the use of a credit against New York tax for the amounts paid to California. Sometimes this makes the taxpayer "whole," while others it does not.
In 1994, the Federation of Tax Administrator's (FTA) Task Force on Nonresident Income Tax Issues published a report titled "State Income Taxation of Nonresident Professional Athletes," in which the FTA recommended a uniform approach to allocating the income of professional athletes that was subsequently adopted by many states. Under this uniform approach, a baseball player's annual salary is allocated based on total "duty days," or the total number of days from the first day of spring training through the last game of the season. During the baseball season, there are approximately 210 duty days, stretching from late February through October.
These 210 days are allocated to each state based on the number of duty days the athlete spends within the state. Specific to baseball, travel days which include a game, required practice, meeting or other service are apportioned to the state in which the game, practice or service is conducted. Travel days involving no game, practice or required service will not be apportioned to any particular state, but will be included in the total number of duty days.
To illustrate the effect of these rules, let's examine the case of Bud Norris, the pitcher for the Houston Astros who was dealt just before the deadline to the Baltimore Orioles. Norris is owed approximately $ 1,000,000 for the remainder of 2013. Texas has no state income tax rate, while Maryland has a maximum rate of 5.75%.
There are approximately 60 duty days left in the 2013 season. Had Norris simply remained in Houston, half of those days would have been spent playing home games, with the other half played on the road. As a result, $ 500,000 of wages would have escaped state income tax entirely, while the remaining $ 500,000 would be allocated to the states in which the Astros played their road games. Assuming an average tax rate of 7%, Norris would pay $ 35,000 in state tax on his $ 1,000,000 of remaining wages.
After being traded to Baltimore, Norris may well decide to continue to call Houston home. Either way, because Norris will now play his home games in Maryland, nearly all of the remaining 60 duty days will be allocated to states with an income tax. Approximately 30 of the days will be allocated to Maryland, with the other 30 allocated to the states in which Norris plays his road games. Assuming again an average state tax rate of 7%, this will likely double his state income tax burden on the remaining $ 1,000,000 of wages from $ 35,000 to $ 70,000. So while Norris may have been a winner in the standings – picking up 24 games overnight – he certainly lost the tax battle.
Now, before you begin launching anonymous, slanderous attacks on me in the comments section, let's get two things straight:
- I recognize that for every dollar of increased state income tax, the athlete in question will be entitled to a greater itemized deduction from their taxable income for federal tax purposes, with the federal tax benefit of the state tax deduction reaching a high of 43.4% in 2013. Of course, because the major league minimum salary is $ 480,000 this year, these individuals will likely all be subject to the return of the PEASE limitation, which will reduce the athlete's state tax deduction by 3% for every dollar the individual's adjusted gross income exceeds $ 300,000 (if married filing jointly, $ 250,000 if single), with the reduction capped at 80% of itemized deductions.
- I also recognize that the {insert your favorite team's name here] are totally awesome, and will surely go on to win this year's World Series, and many, many more in your lifetime.
Now, on to the winners and losers…
Winners
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