Becoming a professional athlete is the dream of many, but a goal accomplished by few. And it’s a lofty goal after all, because the life of a professional athlete can be glamorous as well as financially rewarding.
What’s more, in the United States, professional athletes are revered at a relatively young age, and may be potentially set for life financially—but they have to exercise caution as well as good judgment.
Specifically, an athlete’s busy schedule, along with the millions of dollars in earnings, makes it an absolute necessity that he or she be surrounded with the proper advisors.
One financial factor commonly overlooked regarding the professional athlete is the complex tax situation that comes along with competing in multiple states; this is often referred to as the “jock tax.”
The majority of Americans file taxes in just one state, their primary state of residence. Some file in two states, if they work in a different state from the one where they reside, since it’s necessary to pay state taxes in the state where the income is earned.
A professional athlete, however, may compete all over the country, and possibly the world, thus earning income sourced to several different jurisdictions. This creates a unique tax situation, as an athlete may have to file taxes in numerous states.
One financial factor commonly overlooked regarding the professional athlete is the complex tax situation called the ‘jock tax.’
In addition to the “jock tax,” athletes face taxation on income from royalties, endorsements and merchandising agreements.
Signing a new contract or a contract renewal can also have uncommon tax implications. Without the guidance of an experienced tax professional, athletes may find themselves losing money as a result of overpayment or poor taxplanning. In fact, they may end up owing large amounts of money to the Internal Revenue Service, net of interest and penalties.
Fortunately, there are several tax professionals who specialize in servicing athletes. And it is highly advisable to use one of these professionals, as the tax rules can be quite complex and dissimilar in each jurisdiction.
Likewise, there are several strategies that can help mitigate an athlete’s tax bill. One example would involve residing during the off-season in a state with no income tax, such as Florida or Texas. It’s also relatively common for an athlete to be audited, given the fact that he or she may claim unusual deductions, such as payments to personal trainers and masseuses.
Another service that a professional athlete should consider utilizing is the bill-paying and bookkeeping services that many accounting firms offer to their high net worth clientele. The accounting firm will then have personal financial statements available to the athlete at the agreed-upon date, which is often monthly.
These accountants can help map out an affordable budget in order for the athlete to maintain a comfortable lifestyle, and sustain wealth. In addition, given that a professional athlete is often on the road, the accounting firm will receive an athlete’s mail and pay necessary bills. Most important, however, is the financial guidance that these experts can provide to athletes, especially the younger ones coming into wealth for the first time.
When an athlete is considering hiring a tax professional, he or she should make sure to hire someone adjudged to be competent and trustworthy. Furthermore, the athlete should enjoy speaking with this person, as future conversations will be occurring on a very frequent basis.
Read More From CBIZ MHM, LLC
This article is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to be used and cannot be used to avoid penalties under the Internal Revenue Code, or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.