NFL Players Can Save A Fortune With Tax Decisions

Kurt Badenhausen for Forbes writes: The NFL regular season kicks off Thursday night with the Super Bowl champion Baltimore Ravens visiting the Denver Broncos. The game features high-priced quarterbacks Joe Flacco and Peyton Manning, as well as rookies making the NFL minimum salary of $405,000. As far as jock taxes go, football players have the easiest tax returns among the four major sports because they play the fewest games–so they have the fewest number of returns (typically filing in 10-15 states and cities). But this does not mean tax planning for a football player is simple.

NFL general managers are constantly trying to restructure player contracts to serve teams’ needs while remaining under the salary cap. The byproduct of this wrangling is a string of ever-growing signing bonuses. This year Aaron Rodgersreceived $35 million in his new contract, while Flacco nabbed $29 million.

From a tax perspective, Tony Romo had the most interesting contract restructuring this offseason. As part of his contract extension, his agent and the Cowboys reshuffled his compensation agreement to pay him a signing bonus of $10 million plus a base of $1.5 million instead of the $11.5 million base he was due this season. On paper this looks like no big deal from Romo’s standpoint. After all, he is making $11.5 million either way. Actually, he is making a lot more, after taxes, under the new agreement.

Signing bonuses are generally taxable only in a player’s home state, provided contract language meets certain criteria. So under Romo’s contract, states the Cowboys visit in 2013 are taxing him based on $1.5 million of income instead of $11.5 million. The Cowboys do their players a great disservice by hosting training camp in California, where personal income tax rates are 13.3% for top earners.  But allocating a heavy portion of a player’s salary to a signing bonus becomes an even greater tax savings for players on the Cowboys who play and live in tax-free Texas. All told, the contract restructuring will save Romo nearly $300,000 in state taxes with $213,000 savings in California alone.

Aside from saving tax dollars on a player’s signing bonus, planning residency can save money utilizing reciprocity agreements between states. Flacco received a $29 million signing bonus this offseason and has a base pay of $1 million in 2013, as part of his new six-year, $120.6 million deal. Pennsylvania is an hour drive from Baltimore and close to where Flacco grew up, and currently resides, in New Jersey. Pennsylvania also has the lowest rate among the three states at 3.07%. Jersey’s rate is 8.97% and Maryland’s is 5.5% in addition to local rates, which run as high as 3.2%. Pennsylvania has a reciprocity agreement with Maryland and Ohio, which is home to two of the Ravens’ division rivals. Had Flacco set up residency in Pennsylvania instead of New Jersey, he could have saved over $1.7 million in state taxes in 2013 alone. Of course there is the personal element, and saving some tax dollars might not be worth moving further from family and friends.

Football is rare in that players get a week off during the season. The bye week is designed to give players a break and allow them to recover from the persistent aches and pains the long season produces. It can also be used as a tax-planning opportunity. Jared Allen of the Minnesota Vikings will make $14.3 million in base pay this year, second only to Peyton Manning’s $15 million base, according to salary database Spotrac.com. Minnesota boasts the NFL’s second highest tax rate at 9.85%. Allen resides in Arizona, whose top rate is 4.54%. If he goes home to Arizona during the bye week to work out, recover or get massage treatments instead of using the team’s facility in Minnesota, it will save him more than $33,000 in state taxes.