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Michael Jordan’s Revenge: The Jock Tax

 


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| April 12, 2012

The 1991 NBA Finals was a defining moment in professional sports. It was Michael Jordan’s first NBA Finals, the end of the “Showtime” era for the Lakers, and the beginning of the Bulls dynasty. However, at the same time, a more ominous and quietly discussed tax policy was approved by California State taxing authorities forever changing American sports.

As the story goes, soon after the celebrations, parades and excitement of the ’91 Finals, the State of California notified Michael Jordan that he would owe taxes for the days he spent in Los Angeles. In direct response to this new egregious policy, Illinois passed a bill famously known as “Michael Jordan’s Revenge” – imposing income taxes on athletes from California and any other state that imposed a tax on their residents. Many city and state governments followed suit, seizing the opportunity to reach into the pockets of visiting athletes. Today, nearly every state that hosts professional sports teams has enacted their own Jock Tax policy. Even city local taxing authorities such as Cleveland, Kansas City, Detroit and Philadelphia established similar rules independent of the state.

The Jock Tax policy is a more aggressive and targeted approach to the ‘non- resident’ income tax. A ‘non-resident’ income tax is a tax imposed by States in which you do not live in but do have some income-producing interest. These states (and some cities) can tack on their additional ‘resident’ state tax and have a claim to your money. Taxing authorities track team schedules and rosters every year. An athlete from Chicago, IL playing for the New York Knicks is responsible for both city and state income taxes in both Chicago, IL (Home State) and New York, NY (State of Employment). Additionally, that player will owe money to over 20 state and city governments that the team visited throughout the season (coaching staff included).

What you can do?

A tax plan will save a considerable amount of money. Two accountants will approach the Jock Tax differently. One may calculate the tax as prorated portions of salary another may count the number of professional days in state and use this as a means test. In addition, there are multiple methods to allocate expenses against each states tax. The taxpayer wants the method that works in his favor and there is no way to know which method is best unless the tax professional considers them all. Of course, staying vigilant in keeping track of these expenses while on the road is imperative.

Responsible tax planning must be a critical component of an athlete’s long-term financial plan. Yes, you can structure your assets and investments in a more tax efficient way. If the ‘Michael Jordan Revenge’ tax affects you, reach out to Cherry Bekaert & Holland this tax season to learn how you can best protect yourself.

Noah Sheer is the Director of Sports & Entertainment at CB&H, a full service CPA firm providing audit, tax and consulting services. He has overseen the growth of the CB&H Sports division representing clients in the NBA, FIBA, NFL, NHL, MLB and PGA Tour.







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