The taxing lives of Dwight Howard and professional athletes

June 2, 2013 — 3 Comments

Dwight Howard, a perennial NBA all-star, faces a taxing situation this off-season. Howard currently plays for the Los Angeles Lakers; however, the multi-millionaire has the option to flee the high California income tax rate. The question then becomes: should he take the higher wage that the Lakers offer or take the lower wage from a Texas team where the state income tax would be non-existent?

How do athlete or “jock” taxes work?

As seen in the graphic at the top of this article, almost every state with a major league franchise has a law that requires visiting pro athletes to pay taxes on the income they earn there. Oft referred to as the jock tax, “most states calculate an athlete’s taxable income by measuring the number of ‘duty days’ spent in the state”. Duty days include the first day of a pre-season training session to the last post-season game. On average, an NBA player, such as Dwight Howard, will file taxes in 16-20 different jurisdictions.

To put the “jock tax” in perspective, an out-of-state executive paid by her company to visit Los Angeles for a client meeting or a conference would not owe taxes in the state on the wages she earned during the business trip, according to the Department of Revenue. Yet every NBA player who steps on the floor at the Staples Center must pay the Golden State’s tax collectors.

Moreover, if a visiting opponent of the Lakers compiled 200 duty days in a season and spent 20 of those days in California, he would be taxed on a tenth of his team wages at the California state income tax rate.

How does this affect Dwight Howard?

Currently, the Lakers are offering a 5-year, $118 million deal. On the other hand, if he were to go to any other team, the highest wage he would make is $87.6 million dollars on a 4-year deal because of salary cap restrictions. In turn, Howard would be leaving $30 million out on the table.

So, we go back to the aforementioned question: should he take the higher wage that the Lakers offer or take the lower wage from a Texas team where the state income tax would be lower?

Presently, California has one of the most rigorous state income taxes with the maximum rate set at 13.3% (see also: Mickelson makes Romney-esque Slip on Taxes). Conversely, teams courting Howard (Dallas Mavericks and Houston Rockets), both from Texas, present Howard with a situation in which he would have to pay no state income tax.

To illustrate, “if Howard had $10,000 of income allocated to a state with a 5% tax rate, California, as Howard’s state of domicile, will tax the income at 13.3%, or $1,330. The other state will tax the income at 5%, or $500. Finally, on his California return, Howard will get a $500 credit for the tax he paid to the other state, reducing his California tax to $830, but his total tax will still remain $1,330 ($500 to other state + $830 to California).”

Contrariwise, if Howard takes the hike to Texas, he only gets taxed for “duty days” in states other than the Lone Star state. The Mavericks and Rockets are both members of the Southwest Division so they would play each other and the Texas-based, San Antonio Spurs, which means those games would not be taxed. Similarly, the Rockets and Mavericks will play the Miami Heat and the Orlando Magic in Florida, another state that does not have a state income tax.

And lastly, “they will play two road games each year against the Memphis Grizzlies, and while Tennessee technically has an income tax, it is only assessed on interest and dividends, and not compensation.”

So, if Dwight Howard were to join either the Rockets or Mavericks, 49 of his 82 NBA games would not be taxed under state income. This would leave 33 games in states that tax income. To make this situation more realistic, we could say that Howard plays in 5 playoff games that are in states that have a state income tax. This would leave us with 38/270 duty days and thus, 14% of Howard’s earnings would be taxed. At an average state income tax rate at 5%, Howard would pay $600,000 in income taxes with a Texas-based team.

When all is said and done, the Lakers with the excess cap space would be able to offer the higher payout at $91 million (4-year deal) as opposed to Houston or Dallas’ $87.6 million. After 4 years, Howard would pay $12 million in taxes if he remained in California; however, he would only pay $600,000 with a Texas-based team.

Altogether, Howard would actually come out with an $8 million dollar income after taxes if he made the switch to one of the less glamorous NBA franchises in Texas.

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JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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