Monday’s post about Cliff Lee’s taxes created quite an interesting discussion in the comments section. Off of the site, I had a good conversation with Robert Raiola, a CPA at Van Duyne, Behrens & Co., P.A. Raiola helps many athletes with their taxes and provided great insight to Darren Rovell of CNBC in his piece on Cliff Lee and taxes from November 4, 2010. Here are some figures that Lee might have considered when weighing the options of going to play for the Yankees, Rangers, or Phillies:
*State taxes based on top individual income tax rate in Pennsylvania (3.07%), New York (8.97%), and Texas (0.00% – tax listed based on “jock tax”).
I also spoke to Chris Dingman of The Dingman Group to find out where Lee might be looking to move now that he is a member of the Phillies. Dingman’s Philadelphia clients (MLBers & NHLers) have typically been attracted to Haddonfield, New Jersey. Players also like Rose Tree/Media area in Delaware County, PA. Both places have great schools with easy access to the stadium. Single players generally like to live in South Philly near the stadium.
Raiola says the tax play is for Lee to get a place outside the city limits of Philadelphia, since Philly has its own separate city tax rate of 3.9285% for residents (3.4985% for non-residents – Lee would only have to pay this tax on half his income – half his games are played in Philly). New Jersey has a top individual income tax rate of 8.97%, which is a gross income tax rate (no write-offs). Lee could live there, but still attempt to remain domiciled in Arkansas as a resident, which has a slightly lower tax rate.
This is why you make guys like Raiola and Dingman a part of your team; your clients will come to you to ask about tax and relocation questions. It is better to become familiar with the experts in those areas so that you are well prepared to give your clients options immediately.
7 replies on “Did Taxes Have A Role In Cliff Lee’s Decision?”
Thats some good analysis. I’m sure taxes were one of many reasons to go to Philly.
Another good reason for Philadelphia athletes to live in New Jersey vs. Pennsylvania (assuming not maintaining resdiency elsewhere) is that NJ is one of the few states that allows a credit for taxes paid to cities in addtion to teh credit for taxes paid other states. This can be a big additional deduction given the Philadelphia tax rate.
When making the kind of money Cliff Lee is, taxes will be a consideration, but it should not be a major part of the decision. There are a ton of other considerations that go into making a decision. The tax tail should not wag the dog!
The tax table above may not be very accurate. Just looking at the table it appears that the author may have included the buy out (Yankee’s and Rangers) in the gross total of the contract and therefore the total amount would be taxed. However, the team may or may not exercise the buy out. Therefore the gross total could change thereby changing the amount of tax owed.
Just for fun consider the above table scenario and all other factors being even. After taxes the best deal would be the Rangers at 6 years for a net of $85m. That is 1 more year at $10m for that year than the Phillies and $1m more for that 6th year than the Yankees.
Another good reason for Philadelphia athletes to live in New Jersey vs. Pennsylvania (assuming not maintaining residency elsewhere) is that NJ is one of the few states that allows a credit for taxes paid to cities in addtion to the credit for taxes paid other states. This can be a big additional deduction given the Philadelphia tax rate.”
“When making the kind of money Cliff Lee is, taxes will be a consideration, but it should not be a major part of the decision. There are a ton of other considerations that go into making a decision. The tax tail should not wag the dog!
The tax table above may not be very accurate. Just looking at the table it appears that the author may have included the buy out (Yankee’s and Rangers) in the gross total of the contract and therefore the total amount would be taxed. However, the team may or may not exercise the buy out. Therefore the gross total could change thereby changing the amount of tax owed.
Just for fun consider the above table scenario and all other factors being even. After taxes the best deal would be the Rangers at 6 years for a net of $85m. That is 1 more year at $10m for that year than the Phillies and $1m more for that 6th year than the Yankees.”
What is not taken into consideration in the above scenario is that half of Cliff Lee’s games and thus income will be earned outside of his state of residence. Since fourteen of the seventeen states that are home to professional baseball teams have state income tax on resident and nonresidents, Mr. Lee’s tax advantage in Pennsylvania and Texas will be limited. In addition, Philadelphia’s city tax which is nearly 4% needs to be taken into consideration. In a study I conducted using the 2006 season and state tax rates I found that an athlete playing for the Texas Rangers would take home 62.46% of his income in comparison to an individual playing in Philadelphia which would take home 59.72% and or the Yankees 58.78%. In addition to federal, state resident and nonresident income taxes both Social Security and Medicare tax would also need to be taken into consideration.
Although I would love agents to be pro-active in their tax analysis, I have never found this to be the case and believe that Cliff Lee’s decision was based on other factors.
Should anyone care to read more about my analysis of the tax consequences of professional athletes and state taxes please feel free to seek out “When is your CPA more important than your ERA?” Marquette Sports Law Review (Spring 2009)
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