Baseball spring training is suspended. The season’s start is delayed. Not on indefinite hold, though: the “jock tax” players must pay on their 2019 income.
A leading financial advisor and tax advisor for baseball players, the CPA’s client list includes stars Cal Ripken Jr., Didi Gregorius, Tom Murphy, Mark Teixeira and former player Omar Minaya, special assistant to the Mets general manager.
The 2017 tax overhaul brought significant changes to taxpayer returns, and the players of Major League Baseball were certainly not exempt.
“The new tax laws dramatically change baseball players’ tax planning techniques and the way their returns are done,” Geier tells ThinkAdvisor in an interview.
One big difference is that, as W-2 employees, they can no longer deduct employee business expenses — on everything from agents’ fees to clubhouse dues. Geier’s value lies, in part, in helping players write off some of those expenses; for example, as deductions on 1099 income they may have received from product endorsements.
Kicking off his career at a large sports management firm, the advisor has worked in the industry for 30 years now. He and his team — several on it are also CPAs — handle all aspects of clients’ financial lives. Geier’s focus is exclusively on baseball players, current and retired.
Given MLB players’ short careers — typically three to five years — the advisor encourages his young clients to think ahead and, for instance, contribute as much as possible to their 401(k) plans.
In the interview, he explains the so-called jock tax: Baseball players and other pro athletes must pay income tax to every state in which they worked during the previous year, as well as the one in which they reside. Many players therefore choose to live in states that have no income tax, such as — and especially — Florida.
ThinkAdvisor interviewed Geier two weeks before MLB announced training and season-start delays because of COVID-19. Speaking from his office in Marriottsville, Maryland, the FA remarked, concerning the tax-law change in deductions, “It’s a whole different ball game, if you will.”
Here are highlights of our conversation:
THINKADVISOR: Has the 2017 tax overhaul benefited or hurt baseball players?
JOE GEIER: Major league players are employees with contracts and part of a union. They receive income from their teams on a W-2. So since they’re no longer able to deduct employee business expenses, it’s hurt them, But the top tax bracket being lowered by two percentage points helps players that make a substantial amount above the major league minimum because their tax bracket was reduced.
What about players who are at the minimum of $563,000 to $1 million?
It probably hurt them because they can no longer deduct those employee business expenses.
What are examples of specific expenses?
The big thing is agent fees — from 4% to 5% of their income. Players used to be able to write off the total fees.
Can they be written off somewhere else on the tax return?
One thing we do is if a player has a substantial 1099 endorsement income, we try to allocate a portion of that agent fee to the endorsement income reported on Schedule C or on a separate LLC.
That must benefit Philadelphia Phillies’ shortstop Didi Gregorius, who does lots of endorsements — reportedly for Nike, Mizuno, Louisville Slugger and Banana Republic, among others.
We’re able to allocate some of his agent fees to his endorsement account, and he can also write off some of the other expenses associated with endorsement income on his Schedule C.
What other expenses can baseball players no longer deduct?
Equipment, clubhouse dues, housing during spring training. It’s a whole different ball game, if you will.
Are there other techniques you use so that some of these expenses can be written off?
We look at the players’ charitable contributions. We encourage players to set up a charitable fund or a community foundation, which allows them to front-load a lot of contributions through a donor-advised fund.
What else goes into tax planning and tax prep for your clients?
We look into their outside interests. For example, Mark Teixeira has bought and sold real estate in West Atlanta and done well with those deals.
One of the unique aspects of pro athletes’ income tax is the “jock tax”: state tax they must pay to every state they play in, and the state where they reside. Please explain.
It means we need to carefully track the income allocable to those states. We make sure we know that if a player is on the IL [injured list] for a period of time and therefore didn’t make a [scheduled] trip to a certain state, income isn’t allocable to that state. So you have to keep track of where the players are.
Why don’t the teams keep track of that?
They do a good job of it, but we double-check and ask the player, “Did you make that trip?” If he didn’t go to California, say, for a three-day trip and he’s [earning] $10 million, for instance, $136,000 would not be allocable to California. During the year, you find that there’s always a player who didn’t make a trip — but the team’s payroll department wasn’t aware of this and allocated wages to that state.
Is the reason so many players live in Florida because Florida has no state income tax?
Yes, and the weather. Also, half the teams’ spring training is in Florida. A lot of other players live in Texas, Nevada and Wyoming, states that also have no state income tax.
Please talk about taxes payable on players’ signing bonuses.
They’re subject to federal income taxes and are allocable to a state, depending on where the player is when the bonus is paid. It helps, say, if a player that just got drafted is in a state that doesn’t have state income tax or has low income tax.
They simply have to be physically there at the time they receive the bonus?
No. If, say, they want income taxed in Florida [where there is no state income tax], it’s important that they establish residency there; also, they have to be assigned to a team in that state. They can’t just say, “I’m going to Florida for two weeks — pay me while I’m there!”
Do you apply tax harvesting to your clients’ investments?
With the bull market, there weren’t too many losses. But you never know; so at the end of the year we’re always looking at a guy’s investment account to see if there are any gains we may be able to offset.
To what extent do you take into account the short career of pro baseball players?
That’s part of tax planning. The average baseball player’s career, if he makes it to the major leagues, is four to five years. So it’s up to the players to put as much money away as possible. We encourage them to max out their 401(k)s. Major League Baseball also has a great pension plan that the players become part of.
How do you usually acquire clients?
We get a lot of referrals from our current clients and agents that we’ve established relationships with. We also have a business-development person who’s out there trying to get connected with players that may be eligible for the draft or the amateur draft of high school and college students the first week in June. We reach out to their parents to let them know about us.
Is spring training a good time for adding new clients?
Yes, that and the off-season are typically the ideal time for us to recruit or get clients. Also, during the season, we’ll be introduced to players who need some advice and are looking for financial advisors. Or players will seek us out that just got called up to the big leagues, and it’s time for them to work with an advisor.
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