With just over a year to go before many of the provisions of the Tax Cuts and Jobs Act sunset, taxpayers and tax professionals are waiting anxiously to see which, if any, will be extended. Professional athletes, who play as many as half of their games in states other than the one in which their team is located, and may reside in yet another state, are high on the list of those who should be paying attention.
W-2 employees with out-of-pocket expenses may see significant tax savings if Congress allows the TCJA to sunset, according to Miklos Ringbauer, of MiklosCPA, an accounting and tax strategy firm based in Los Angeles.
"Where possible, athletes may want to consider waiting to pay some expenses until 2026 — when a deduction may be available — versus paying in 2025 (or prepaying in 2024) when the expenses are nondeductible," he said.
Removing the $10,000 cap on the deduction for state and local income taxes could also be a significant benefit to most professional athletes, Ringbauer observed: "Whether they reside in a high-tax state or low-tax state, since professional athletes incur a 'jock tax' as nonresidents of the states and certain cities where they play road games."
Even if an athlete is a resident of a no-tax state, they may pay significant nonresident state and local taxes from the states and cities where the team travels — which, under TCJA rules, are deductible only up to $10,000.
Under TCJA rules, expenses directly related to endorsement income such as appearances, royalties, sponsorships, and so on (including agency fees, travel expenses, professional fees, etc.) are deductible against business income — which is generally reported on a Schedule C under business profit and loss.
Ringbauer offered this hypothetical example to demonstrate the decisions that athletes must make in planning their career: John Smith is a pitching prospect in Major League Baseball who worked his way through the minor league system. Two teams offer him a one-year contract around the league-minimum salary of $740,000 for 2024. Under the collective bargaining agreement, it is expected to be raised to $760,000 in 2025 and $780,000 in 2026. He had to decide whether to play for a California-based team or a Florida-based team during 2024. After consulting with his tax advisor, he learned that he would be subject to the California state income tax of more than 11% if he signed with the California team, but would not be subject to state income tax if he went with the Florida team because Florida has no income tax.
After considering the pros and cons, Smith signed with the California team. Although he'll take home less after taxes, the prospect of living in his home state of California plus the future earning potential of playing for a "big-market" team outweighs the short-term savings in taxes in Florida playing for a lesser-known team. He can always come back to the question of claiming residency in another, non-income-tax state later, when his paycheck is bigger.
Business expenses for self-employed athletes such as golfers or other individual sports are deductible under the TCJA — the deduction rules differ for W-2 employees compared to Form 1099 contractors. Many self-employed or independent contractor athletes may use an S corporation for self-employment tax and state pass-through-entity tax planning purposes.
"Certain states that did not conform to the TCJA have allowed a state-level deduction for unreimbursed employee expenses, including California, Minnesota and Pennsylvania," Ringbauer noted. "This could potentially reduce taxable income, resulting in lower state taxes owed. CPAs should work with professional athletes and their agencies to develop timing strategies for when certain expenses may bring more beneficial tax deductions. The post-election weeks should bring more clarity to whether Congress will allow all or some of these provisions to sunset, or if the TCJA will be extended."
