State Income Taxes & NBA Free Agency

After the Cleveland Cavaliers won their first NBA championship back in June, interest in the NBA hardly waned. Soon after the LeBron James and company hoisted the championship trophy in Oakland, the NBA free agency began and a multitude of players changed teams including Kevin Durant, Dwayne Wade, Joakim Noah and Brandon Jennings (the latter two to our hometown Knicks). For NBA players it seemingly is just another contract and another (out-of-this-world) payday.

Well, it is of course but there’s more to it than this.

Millions of dollars in salary and income translates into a significant tax bill. But there’s a way for NBA players, especially those that are free agents, to mitigate this tax burden. Everyone is subject to federal income tax, but not everyone is subject to state income tax. Granted this is a relatively small percentage compared to those that live in a state which imposes an income tax. But the fact remains that there are seven states which do not impose an income tax and five NBA franchises are located in two of these states.

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not impose an income tax on their residents. New Hampshire and Tennessee only impose a tax on dividends and income from investments. The Miami Heat, Orlando Magic, Houston Rockets, Dallas Mavericks, and San Antonio Spurs are NBA franchises which are located in Florida and Texas, two of the states with no income tax. The Memphis Grizzlies are located in Tennessee, another tax-friendly state.

Players that sign as free agents with any of these six teams may look forward to paying nothing (or almost nothing in Tennessee) to their franchise’s home state in the way of income taxes.

Any contract signed with any of the aforementioned franchises carries significant tax savings in the millions of dollars.

However, it’s not that simple. The manner in which an NBA player calculates his tax bill on the city and state level is complicated. The majority of governmental taxing bodies like states, and even cities in this case, assess a tax by calculating “duty days,” which is the number of work days spent in a particular state. Work days include all of the days that a player is in a city and state in preparation for the game and not just the day of the game itself. This total is then pro-rated by dividing the number of work days in a season by the number of days in a particular city or state.

There’s also the issue of where the player lives during the offseason. A player may maintain his primary residence in a state different from the state where his team is located. A smart player planning ahead, intending to reduce his tax bill, should consider maintaining his primary residence in Texas or Florida, which many in fact do.

Some members of the Knicks and Nets forego living in New York and instead choose to live In Connecticut and take advantage of its lower tax rates. Former Syracuse Orangeman and New York Knick John Wallace did just this. When LeBron James left Ohio for the Miami Heat, he pocketed and saved over 5% of his income by avoiding Ohio’s state income tax. However, this year when he signs a maximum contract in the range of $25 to $30 million dollars with the Cavs, he’ll once again be subject to Ohio’s 5.+% income tax, which will result in a tax bill of over 2.5 million dollars to the King.

If you have any questions about taxes, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.