With scenario
s aplenty, there is no question that this summer’s NBA free agency period is pivotal for franchises looking to contend for an NBA championship over the next few years. LeBron James has been the center of this free agency buzz. Analysts have drawn up scenarios that would land James in New York, Miami, or remain in Cleveland. Each analyst has his or her own rationales for James choosing one team over the other, such as current team roster, chances of winning a championship, and endorsement opportunities. Well, this post will consider the tax implications of James’ free agency move.
Under the NBA collective bargaining agreement, Cleveland has the ability to offer James the most lucrative contract. His starting salary will be the same wherever he plays, however, Cleveland can offer him an additional year (six instead of five) with larger pay increases (10.5 % instead of 8%). The offer has been estimated to amount to $125.5 million over six years. Other teams can offer about $96.1 million over five years.
For sake of comparison, lets assume James’ deal is a five year deal wherever he lands. Therefore, his deal with Cleveland would amount to about $100.2 million versus $96.1 million that the other teams can offer. While these deals are close monetarily, depending on where James plays he may be subject to state income tax (other taxes may apply such as higher sales taxes, property taxes, and other states “jock” taxes* but those are outside the scope of this post). Let’s take a look at the tax implications of choosing Cleveland, New York, or Miami.
Cleveland. Home is where the heart (and where the money) is. Certainly James is strongly considering remaining home in Cleveland. Not only is Cleveland his hometown, it is where he can make the most NBA money. However, James will continue to pay approximately 6% in state income taxes. Further, several cities levy municipal income taxes which could raise his tax liability. These taxes are in addition to his federal income tax liability. Therefore, while James will see a bigger gross amount on his pay check, he will be giving at least 6% of that income to Ohio.
New York. For James, a move to the Big Apple could mean big endorsements, but it also means big taxes. New York ranks at the top in regards to percentage of income that is subject to state taxes. James could be subject to a 9% state income tax in addition to his federal tax liability. While he may see greater returns from endorsements, he will also see a greater amount of those dollars going to the Empire State.
Miami. A move to South Beach yields James the best scenario in tax savings. Florida has no state income tax. This mean that James’ Miami salary would only be subject to federal income tax. Further, James could take the part of his salary that he would have had to hand over to Ohio and New York and donate it to the charity of his choice (assuming the charity meets the requirements for the charitable deduction under the Internal Revenue Code) and reduce his federal tax liability with use of the charitable deduction.
We can only wait until the start of free agency to get a better picture of where James and the cast of free agents ultimately decide to play in the future. However, as far as tax savings are concerned, Miami is a slam dunk.
*A jock tax refers the levying of state and local income taxes on traveling business professionals, particularly visiting professional athletes. Jock taxes require that traveling professionals pay income taxes in every state where they earn income or have an “economic nexus.” – Tax Foundation