While there are some fans cheering and others jeering the recent changes made to the U.S. federal tax code, if you are a professional athlete, you might not be so thrilled. As you may already be aware, the new tax law has been passed by the U.S. Congress and signed by President Trump, effective for the tax year beginning January 1, 2018. For professional athletes, this new law will negatively impact athletes who are U.S. taxpayers. Below, I provide some updated “stats” that athletes and their advisors should be mindful of.
- No Deduction For Employee Expenses.
Previously, expenses in excess of 2% of an athlete’s adjusted gross income were deductible. Now, such deductions are no longer allowed. This means that agent fees, union dues, clubhouse dues, and other training and related expenses can no longer be deducted if attributable to an athlete’s services as an employee of a team.
- Maximum $10,000 Deduction For State and Local Income and Property Taxes.
This will affect nearly all athletes earning substantial wages in the United States because the deduction for such taxes is now limited to $10,000. Many athletes pay local income taxes in high-tax states such as California, New York, New Jersey, Illinois and Pennsylvania. This provision may significantly increase an athlete’s federal income tax liability.
- Cap on Mortgage Deduction.
Interest attributable to a first mortgage home loan is not deductible to the extent that the loan exceeds $750,000 (the prior limitation had been $1,000,000). However, as a general proposition, this reduction applies only to mortgage loans incurred after December 15, 2017.
- Moving Expenses Are No Longer Deductible.
Trades just became more costly to an athlete. Under prior law, the team could pay the player’s moving expenses and there would be no taxable consequences to the player. Or, the player could pay those expenses himself and take the cost as a deduction, at his choosing. Under the new law, if a team directly pays the moving expenses, the player will nonetheless be taxed on the value of this amount. If the player pays those expenses himself, the expenses are no longer deductible. This provision is yet another reason why a No-Trade Clause is valuable.
There is good news to go along with the bad.
- New Lower Top Marginal Rate.
The top marginal rate was lowered from 39.6% to 37% on income above $500,000 for single taxpayers and $600,000 for married taxpayers.
- 20% Deduction for Pass-Through and Sole Proprietorship Income.
Many pass-through entities (such as S corporations, LLCs and partnerships) and sole proprietorships will be entitled to a 20% deduction against their income. Professional athletes may want to consider arranging their business affairs to qualify for this deduction in connection with their marketing/licensing income.
The above bullet points represent just the highlights of the new tax law as it relates to professional athletes. Of course, there are other issues that will impact the professional athlete. Every athlete has a unique situation and his or her situation should be analyzed by his or her agent, tax attorney or other tax professional.