Pro athlete earnings have the potential to soar beyond the average paycheck. However, with great salaries come great taxes, and for athletes, it’s not about where they live, but where they play.

The ‘Jock Tax’ is always a topic of discussion in the world of sports finance. It is infamous for its complexity and the stress it induces in athletes and their financial advisors.

In simple terms, the Jock Tax is the income tax imposed by states, cities, and even some countries on visiting athletes who earn money within their jurisdiction. It’s a slice of the athlete’s income allocated to each place they compete, often leaving them with a tax return as convoluted as a playbook. But why do states and cities do this, and how does it affect the athletes’ bottom line?

The History of the Jock Tax

The story begins in the 1990s, when California was the first state to apply the tax. Eventually, many states followed suit, attracted by the sizable earnings of professional athletes.

For the cities and states, the Jock Tax is a lucrative revenue stream. They argue that these athletes are conducting business within their territories and, therefore, should pay taxes like any other traveling professional. This logic hinges on the concept of ‘nexus’—the minimum connection necessary for a state to impose a tax on an activity.

How Jock Tax Pertains to Professional Athletes

Here’s how it works:

Athletes’ earnings are divided by the number of duty days—days spent in a specific location for work— and then multiplied by a fraction that considers the number of games in a season, as well as practice days, media days, and traveling. This provides a taxable income for each jurisdiction.

While established athletes may have grown accustomed to the Jock Tax, it’s a head-scratcher for rookies or those traded or signed mid-season. Estimates, tracking, and detailed documentation are required, making tax time a marathon that taxes their patience as much as their income.

The Impact on the Athlete’s Lifestyle

The tax affects more than an athlete’s bank account. It influences the choice of where they live, the duration of their career, and even team performance. High Jock Tax states can be less enticing to free agents looking to maximize their take-home pay, potentially impacting the team’s ability to attract and retain talent.

For athletes whose careers may span only a decade or so, taxes can dictate the timing and tenure of their work. It’s no wonder tax planning is as much a part of their playbook as perfecting a jump shot or mastering a backhand.

The Jock Tax isn’t confined to U.S. borders. International athletes playing in the U.S. can find themselves navigating a web of tax treaties and laws. The U.S.’s system of withholding tax for foreign athletes is particularly labyrinthine, requiring detailed tracking of income earned in the U.S. and international offsets.

It’s an added layer of complexity that foreign-born professional athletes have to master, or at least outsource to a team of tax experts.

Mitigation and Planning

Despite its challenges, the Jock Tax is not an immovable opponent. Through careful planning, athletes can mitigate its impact. Strategies range from adjusting travel schedules to maximizing deductions and credits. Establishing residency in a low- or no-income tax state is a common play in the tax playbook.

For the highest earners, strategies like charitable remainder trusts and deferred income plans can offer significant savings. But planning must start early, be part of a coherent financial strategy, and be reviewed and adjusted regularly.

Navigating the Jock Tax is a mix of education, preparation, and partnership with tax professionals who are familiar with the rules. Our team helps athletes navigate the rules to their advantage while staying fully compliant. Reach out to Justin Linscott and Zac Anderson with Holbrook & Manter for assistance with the Jock Tax today. Meet them here: Accounting Services for Athletes | Pro Athlete CPA | H&M (holbrookmanter.com)