When J.J. Watt (pictured on left) the 2012 NFL Defensive Player of the Year suits up to face the Jacksonville Jaguars on December 5, 2013, the Houston Texans’ defensive lineman will try and help his team win a road game. Even if Watt fails to record a sack of the opposing quarterback or if his favored team fails to win the game, Watt will still have successfully tackled the “state tax man.”
Watt who owns a home in Pearland, Texas is probably considered a resident of Texas. Hopefully his tax consultants advised him to be physically present in the state more than 183 days each year rather than his native Wisconsin. He should have registered to vote, have a Texas drivers’ license and possess many other indicia of residency, proving he is domiciled in Texas. This is because Texas does not have a state income tax.
State tax authorities are hungry to collect when a performer or athlete enters their state for a quick pay day. If Taylor Swift appears in concert at Madison Square Garden, the State of New York will withhold taxes from the box office proceeds. Every time J.J. Watt and his Texans play a game on the road, the state he plays in expects to collect taxes. His salary over the sixteen regular season games and four preseason games would be prorated resulting in 1/20 of his salary being allocated to each jurisdiction. The state taxes due on just one out of town game can be a significant.
As the 11th pick of the 2011 NFL draft Watt was signed to a $11,237,000 four year contract. Of that amount $6,672,000 was designated as a signing bonus. If the terms of the bonus meet certain criteria it would most likely be taxed by an athlete’s state of residency. Hopefully Watt established residency in Texas (rather than in Wisconsin with its 7.75% tax rate) before he signed his NFL deal.
In 2011 a rookie pay scale was instituted in the NFL as part of a labor agreement with the players association. Had Watt joined the NFL just a year earlier he would have been free to negotiate a larger contract. Because of these financial constraints the superstar lineman is only the 13th highest paid player on his team. Nonetheless, Watt is still one of many athletes whose earnings dwarf the fans who root for them. His current salary of $1,296,590 spread over twenty games works out to be $69,830 per contest.
In the first week of the season Watt played against the San Diego Chargers. The Chargers pass protected their quarterback Philip Rivers, often double teaming Watt and keeping him from registering a single sack. Watt’s team still won the game by a three point margin. But the State of California effectively placed a triple team on the player, making him responsible to pay more than $3,000 of California income taxes from this one game.
Having the good fortune of being drafted by the Texans, Watt became eligible to save state taxes on 50% of his games. But the 2013 season schedule permits Watt to actually do even better. The Texans’ fourth preseason game was played in Dallas against the Cowboys. That’ counts as another game played in Texas. And in December when the Texans play the Jaguars the venue will be Florida which also has no state income tax. Only 40% of Watt’s games (8 of 20) will be taxed by states with income tax regimes.
Road trips to Texas and Florida could serve to create unexpected tax-free bonuses for professional athletes. A player’s accountant might look forward to perusing the NFL schedule to determine how many road games will be played in a tax friendly environment.
But not every trip to Texas and Florida will earn a player a respite from the tax man. Eli Manning and the New York Giants visited the Cowboys on their home turf during the first week of the season. Manning is ineligible to save because he has two homes, one in Hoboken, New Jersey and another in Oxford, Mississippi. Depending on all the facts and circumstances relating to his whereabouts, Manning is considered to be a tax resident of one of these two states.
Accordingly, he would still be responsible to pay income taxes to his home state on the income earned in Texas. He certainly will pay taxes to New Jersey on the income earned from Giant home games played at Met Life Stadium in East Rutherford, New Jersey.
Manning will round out his state tax burden by filing tax returns in many of the other states that house NFL cities. So when Manning also travels to San Diego for the Giants’ 13th game of the season, he too will have to pay taxes to California on that single game. The only silver lining is that his state of residency will grant Manning a tax credit for taxes paid to California. The credit is designed to make sure that he will not be taxed by two states on the same income. Otherwise a two state assault on identical income would be worse than any blitz Manning would face from an opposing team’s defense.
P.S. If you were a free-agent athlete how important a consideration would state income tax savings be to you? Would the economic savings be a major consideration? Lebron James signed with the Miami Heat to play along with Dwayne Wade and Chris Bosch. How much did state tax savings play in his ultimate decision? Would you give a team in Florida or Texas an extra look? Looking forward to your reply. [mc4wp-form]