The “Jock Tax”

(From Michael Jordan to a Top Boston Red Sox Prospect - Issues Encountered by Athletes and Entertainers)

October 2013

Sports enthusiasts in New England have had much to cheer about as they watched their beloved Red Sox win this fall’s World Series. For those who have not been following the organization closely, this fall was their first opportunity to see Xander Bogaerts take the major league field. Coming into this past season, Bogaerts was regarded by Baseball America as the top Red Sox prospect at any level. The publication also considered him as the eighth best prospect in all of baseball. The now 21-year-old Bogaerts was named the 2012 Red Sox Minor League Offensive Player of the Year. Although he began this year playing for the Double AA Portland Sea Dogs, most agreed that it was just a matter of time before he found himself playing at a higher level of competition. The budding star proved this forecast to be true. After being promoted to the Triple AAA Pawtucket Red Sox for only a short stint, he was promoted to major leagues. Bogaerts now holds the distinction of being the youngest player in Red Sox history to start a major league playoff game.

Bogaerts’ ascent highlights the regularity with which athletes can move between cities. In the past decade, we have seen a growing number of stories related to the tax implications associated with this mobility. The notion of a “Jock Tax” first grabbed headlines in 1991, after the Chicago Bulls defeated the Los Angeles Lakers in the NBA Finals. After the loss, the State of California sent notices to Michael Jordan and other members of the Bulls, informing them that they would owe taxes for income attributable to days spent in California. In response, the State of Illinois passed a bill which imposed income taxes on athletes from California, or any other state that would impose a tax on its athletes. The door was now open to levy such income taxes on athletes at the state and city level. Given that information on team schedules and salaries of players are readily available, states and cities recognized they could calculate amounts of tax due quite accurately, and with very little investment of time.

We understand that the State of California was compelled to target Michael Jordan because he had a significant level of income. But, more than 20 years after the fact, the consequence of this initial action is that all professional athletes, regardless of their income level, must consider the Jock Tax. This impacts players in the minor leagues, as well as coaches and some staff.

Financial advisors for professional athletes at all levels should keep the following in mind when considering the impact of the Jock Tax on their clients:

  • The tax can be an issue for money earned for the performance of services, i.e. playing in a game, as a non-resident of a given city or state.
  • Time spent in preparation for a game, such as to practice, should also be considered when factoring for performance of services.
  • Income from other sources, such as endorsements or personal appearances, is likely sourced to the athlete’s state of residence.
  • Jock tax assessments should be considered as a credit on the athlete’s home state return, but typically only to the extent of that state’s maximum tax rate.
  • The Jock Tax should also be considered by non-athlete entertainers.

Although the concept of the Jock Tax has become a consistent issue of compliance, the way in which each state and city calculates it will vary. Likewise, so will the impact on the athlete’s resident state tax return. A constant focus on the ever-changing state tax laws is highly recommended, as this will allow your athlete to construct an appropriate strategy geared towards tax minimization. Watching the progression of an athlete like Xander Bogaerts makes it clear that we should not wait until the athlete is wearing a big league uniform to begin considering these issues.

If you have questions about how these issues might impact you, your athlete or other celebrity, please call Merrill Barter at 1-800-244-7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.