It would be silly for Cliff Lee and his team of advisors to not take into consider the tax consequences of signing a long-term contract. Lee is looking to sign a 7-year contract, which will lock him up in a certain locale, where he will play all of his home games and likely be taxed at that state’s rate. Since Texas has no state income tax, a contract offer that looks like it is worth less on paper, may actually equal or be more beneficial than a “higher” offer from a team in another state. New York has a 3.65% city tax plus an 8.97% state income tax. This should be in the back of Lee’s mind as the Yankees continue to sweeten their offer to the very talented starting pitcher.
Ken Bolson of the New York Times does a good job of briefly highlighting the tax implications of Lee’s decision; however, I am a little confused by the very last sentence of his piece, where he writes,
He could also do what a lot of star players do: Ask the Yankees to pay his local taxes.
Interesting, because I have never heard of a professional baseball team agreeing to pay any of its players’ taxes. A few accountants who deal with professional athletes’ taxes tell me that no team will ever pay the local taxes for an athlete. A team may pay a player more money based on an understanding that the player acknowledges the tax consequences of his decision, but that is not a direct payment of taxes. So where does Bolson get this idea from?
8 replies on “Cliff Lee Thinking About Texas Taxes”
Does it matter that he will always have (just bought a big house in Little Rock) an Arkansas address? Arkansas has state income tax, and, as I understand it, he would have to not list any residence in Arkansas & be only in Texas to qualify. Maybe I am wrong on this…..
What matters is his domicile. If his primary residence becomes the state where he signs a contract (I think he will have more than enough money to purchase another house), then he will have to pay that state’s income taxes.
The team paying his taxes would still be considered income to Lee anyways…? See Old Colony Trust v. Commissioner 279 U.S. 716 (1929); this is what law students do with their free time, because right now I’m studying for my federal income tax exam that’s in two hours…
What is the holding of the case?
Taxpayer’s employer paid his income taxes; the Court held that the discharge by a third person of an obligation to him is the equivalent to receipt by the person taxed; payment of tax was like compensation and thus should be taxed like income
Also, payment of another’s taxes might not be considered a legitimate business expense of a team, and thus not be deductible as an expense on their own tax return. There is never a good reason to pay someone else’s taxes (or have another pay the taxes for you).
The typical practice is to gross up the contract amount in an amount that leaves the taxes equal to the other jurisidiction.
Also, taxes are paid where the money is earned in MLB. So MLB players usually have to fill out 20+ tax returns each year, for each taxing jusridiction they played in, and the amount of income is pro-rated for each game played. A 3-game series = 3/162 of the player’s salary is subject to being taxed in that jurisidiction.
My understanding is that a person is required to file a tax return in each jurisdiction in which they earn income if required by that jurisdiction. So, in this case if Cliff Lee lists his primary residence as Arkansas and signs with the Yankees, then he would be responsible for filing an Arkansas State tax return in which he will declare his income and then list on that return the portion of his income that was earned in that state (most likely will be interest income, investment income, etc), then also list all the other states (New York, and any other jurisdiction the Yankees play) in which he earned income and the taxes he paid on that portion of income. The income that was earned outside of Arkansas will be excluded from his Arkansas totals because it will have been earned from activity outside the state and he would have paid tax to that jurisdiction, if required by that jurisdiction.
Michael is correct in his statements that if an employer pays the employee’s tax liability then that payment is treated as income to the employee. So, in essence, the employee will only be paying the tax on the employers payment of his tax liability which will be a greatly reduced amount.
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