California Tax Hike Takes Toll on Millionaire Athletes
Multiple financial hits on the tax front this year may lead to an exodus of the wealthy from the Golden State, with professional athletes likely at the head of the line.
It’s a tough time to be rich, and especially in California. In November, its voters passed Proposition 30, its first tax hike since 2004, and one that hits top earners at a whopping 13.3 percent rate beginning this year. It’s a 29.13 percent jump that has been compounded by a 5 percent increase in federal taxes on those in the top bracket.
Professional athletes are unhappier than most since they’re also subject to paying non-resident income taxes in states where they play while on the road. While all employees whose earnings are generated from work outside their home states are subject to the tax, it is being called the “jock” tax because that’s where enforcement has been concentrated.
So, those who live in California actually experience a triple tax bite. And they do not like the sting.
Consider pro golfer Phil Mikelson, one of the last professional players on the PGA Tour to still reside in his native California, and one of the sport’s highest earners, who made $60 million in 2012 between the game and endorsements.
While Mikelson apologized later for commenting publicly on private matters, he complained about California’s increase at the Humana Open in January. Calling the effective tax rate of 60 percent “excessive,” he said it might push his family to move. According to Foxnews.com, the increase alone from to 13.3 percent from 10.3 percent cost Mikelson approximately $1.8 million of his 2012 income.
He’s not the only professional athlete thinking that way, according to John Karaffa, president of ProSport CPA of Virginia. The firm represents approximately 300 professional athletes, largely football and basketball players. “I think California will see some leave for sure. They were already a very high tax state and it’s getting to a point where folks have to make a business decision as well as a lifestyle decision.”
Relocating for tax relief is nothing new. Tiger Woods departed Orange County, California in 1996, joining the majority of pro golfers who reside in Florida, which has no personal income tax. Shaquille O’Neal and Ken Griffey, Jr. also found refuge there.
The tax difference for a single professional athlete making roughly $10 million a year between being a resident of California versus Florida is around $800,000 annually.
Former Los Angeles Angel Torii Hunter, now a Detroit Tiger, last year was in the news for moving to Texas because of the state’s lack of income tax. This didn’t protect his game checks from the income taxes, but it did allow him to save taxes on other income from endorsements. Hunter did, however, save money on taxes by leaving California to sign with Detroit, as Michigan’s income tax rate is a flat 4.35 percent.
The impact of the new tax rates will make itself felt paycheck by paycheck, as the year and athletic seasons progress, according to Karaffa. He thinks more of his clients and other pros will be thinking about leaving California.
“They will ask more questions and be more attuned to this. You’ll see more attention paid from professional athletes to their taxes this year because this is their largest expense,” he said.
For Mickelson, the decision is still being weighed. As he put it: “I’m like many Americans trying to understand the new tax laws. I’ve been learning a lot and talking with people who are trying to help me make intelligent and informed decisions. I certainly don’t have a definitive plan at this time, but like everyone else I want to make decisions that are best for my future and my family.”
And that’s a good course to take. The fact is that tax laws are complicated for average people, and exponentially more so for those like professional athletes who have multiple streams of income and locations where their “work” takes place.
It makes it critical that professional athletes – in California or any other state – take care of their interests by utilizing services of professional CPAs like ProSport to ensure they’re informed of all the angles and short- and long-term implications of their tax situation.