After getting swept by the Golden State Warriors in the NBA finals, Lebron James has a tough decision ahead of him – will he stay in Cleveland or will he take his talents elsewhere?
There are several considerations for The King:
- How will this choice impact his legacy?
- Which team offers him the best shot at a championship?
- What city does he and his family want to live in?
- How will his decision impact his tax return?
Professional Athlete’s Tax Returns are Complicated
For the average American it’s uncommon to file a tax return in more than one state. Even if you live on the border of one state but work in another state you will probably file only two tax returns in a given year. But for professional athletes, not only do they have to file taxes in their home state but they also have to file in every state—and some cities—in which they play.
With over 82 games spread across more than 20 states, an NBA player’s tax return can be extremely complicated. Throw in the prospect of a trade or joining another team through free agency and you make matters even worse.
This is because each state determines the rules on the taxability of income generated from players as well as income generated from each sport. For example, Pennsylvania taxes basketball, baseball, and hockey players based on the ratio of games played in state over the total games played during the pre- and postseason.
Football, however, is an entirely different issue. In Pennsylvania, football players are taxed based on days worked in the state over total days worked during the year. As you can imagine, it is more expensive to play football in Pennsylvania than it is to play Basketball – you probably understand now why most sports teams have preseason training in low tax states.
Where You Live Matters the Most
The most important factor when it comes to state tax issues for athletes is a concept called domicile. Domicile is essentially a fancy term for where a person lives. For state tax purposes, a person can have only one domicile at a given time.
Given this fact, several professional athletes choose low tax or zero tax domiciles to shelter their earnings on and off the court. In fact, according to a study published in the Journal of Sports Economics, “free agents that sign into relatively lower income tax quartiles” have better stats, and are more likely to be All-Stars and high draft picks.
Some athlete’s even go as far as choosing a domicile in an entirely different state than where their team is located. This move could save players thousands, if not millions, in taxes by sheltering their endorsement and investment income in a lower tax jurisdiction.
Establishing domicile isn’t as easy as just purchasing a home in a state – it often entails becoming a registered voter, getting a driver’s license, joining a religious organization, or even donating to a local charity in that specific state. But above all, athletes must also spend a fair amount of time in state – especially during their off-season.
Where Will Lebron Land This Offseason?
If Lebron listened to his tax accountant he would take his talents to the Houston Rockets this offseason. With no state income tax, moving to Texas would be Lebron’s best bet. Factor in an all-star cast featuring 2017’s MVP James Harden and former rookie of the year Chris Paul and you have a team favorited to win it all.
Match this option up with L.A. and you have yourself a no brainer. California is ranked at the top of the list of most expensive states to be a professional athlete while Texas is one of the least taxed states in the country. Considering most games will be played at home than in any other state, picking the low tax option should be an easy pick for Lebron.
However, like with most athletes across other major sports, the money is not always the deciding factor.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.