MLB Opening Day: Tax Planning for Ballplayers
The best week in American sports is upon us. The NCAA basketball championship is tonight. The Masters starts Thursday. And today is Major League Baseball’s Opening Day. More than any other sport, baseball is a game whose fans and historians cherish numbers: 61 (73*), 755 (762*), .366, 4,256, 56, 511, 5,714, 2,632 and 42. Baseball fans see those numbers and can tell you who is associated with those numbers and why. Baseball is also the sport with the biggest contracts and the most players making crazy money. A number players care about is the amount of tax they are paying on their income.
Baseball is the easiest sport for an athlete to shelter income from state taxes. To get ready for the season, players are required to report to Spring Training 45 days or more before the season starts. Spring Training takes place either in Florida or Arizona, depending on where the team’s facility is located. Florida has no state income tax and Arizona does not tax athletes until the start of their team’s regular season. This means that if a ballplayer resides in a tax-free state, he immediately shelters 20% of his salary from state income taxes. That is, unless he plays for the Diamondbacks or Tigers—Michigan also ignores preseason duty days when calculating state taxes on an athlete’s income.
Aside from Spring Training, baseball’s regular-season schedule makes it easier for players to claim residency in a tax-free state than other sports. For a state to claim someone as a resident, that person usually must spend at least 183 days there. Football, basketball and hockey players can have a tough time keeping their total under 183, especially if their team makes a long playoff run. Baseball players do not have this issue. The 162-game season occurs over 182 days this year (183 for the Cubs and Cardinals), which includes off days at home and on the road as well as the four-day All Star break. At least 81 days are on the road, usually in a different state.
Even if a team has a bunch of road games in their team’s home state, it is still relatively easy to avoid residency. For example, the 2015 Dodgers will spend more time than any other team in California. They have 107 games in the state, including a three game Spring Training set with the Angels, and all but one off day could conceivably be spent in California. At most their players are only in California for 128 days for work during 2015. But let us assume they go on to win the World Series and all playoff games are in California, which would be impossible. Their players still have only spent at least part of only 160 days in California.
The Dodgers’ (and baseball’s) highest paid player is Clayton Kershaw, who will earn $30 million this season. He reported to Spring Training on February 19 along with LA’s other pitchers and catchers. Without considering the playoffs, Kershaw will report for work a total of 228 days this year and will earn $131,578.95 each day. As a resident of Texas, Kershaw will avoid state taxes on all of his Spring Training days, off days and games in tax-free states. This allows him to shelter $9.868 million of income from state taxes and pay a total of only $2.2 million in state and local taxes. If he was forced to claim California as his residence, this amount would jump to nearly $5.1 million.
Signing bonuses are another way to avoid state taxes. Generally if the bonus meets certain criteria it is only taxable in a player’s home state. Jon Lester is also making $30 million this season. However, half of this amount is via the signing bonus. If we assume that Lester resides in a tax-free state, he could avoid state taxes on $19.8 million of the $30 million he will make this year. He will pay a grand total of about $583,000 in state and local income taxes on his $30,000,000 salary, if he resides in a tax-free state. Even if he lives in Illinois, which cut its income tax rate by 40% this year, he will still only pay a total of about $1.13 million in state and local income taxes on his income.
Baseball’s unique pre- and regular-season scheduling system presents unique planning opportunities for players who can afford to maintain homes where their teams are located and where they wish to be taxed. In some cases, such as above, the tax savings can pay for themselves.
Here are some more baseball tax tidbits for opening day.
Team With the Most Players Making $20 Million or More Base Salary: Yankees, Five
C.C, Texiera, Tanaka, Ellsbury and ARod make a combined $109,642,857 and will pay New York a total of about $3.5 million.
Team With Most Tax-Friendly Schedule: Seattle Mariners
Seattle plays in the most tax-friendly division in baseball, the AL West. Although two teams from this division are in California, three are all in tax-free states. Mariners players will pay roughly 2.23% of their salaries to various state and local governments, just edging out the Rangers, who will pay 2.31% and the Astros, who will pay 2.38%.
Team With Least Tax-Friendly Schedule: Los Angeles Dodgers
As detailed above, the Dodgers win the NL West crown for most taxes paid at 7.42% of their salaries, edging out the Giants (7.37%) and Padres (7.28%).
