The most common financial mistake we see players make is not taking advantage of all the tax savings strategies available to them. This results in you paying more taxes than necessary and missing out on years of future growth on the tax savings amount.
As you know, tax reform is being hotly debated in Congress right now. There are two provisions that have a dramatic effect on professional athletes and require proactive planning before the end of the year. Failure to address this by the end of the year could result in a permanent loss of tax savings on these deductions.
Time-sensitive action items that must be completed by December 31st.
The #1 most important action step you can take TODAY is to have your Certified Public Accountant (CPA) prepare a final tax projection before year-end. Your final projection will determine the benefit and timing of unreimbursed business expenses, including agent fees and state tax payments, to take advantage of disappearing deductions without triggering Alternative Minimum Tax (AMT).
Prepay State and Property Taxes
Both the House and Senate’s proposed tax plan would eliminate the deduction for state and local taxes. Property taxes would be limited to $10,000 in both plans so also consider prepaying a portion before 12/31/17 to maximize the benefit.
Prepay Unreimbursed Business Expenses
All miscellaneous itemized deductions which include, but are not limited to agent fees, clubhouse dues and training expenses would be eliminated. As an example:
- $5,000,000 salary * 5% = $250,000 Agent Fee
- Federal Tax Rate = 39.6%
- Resident Tax Rate = 4.54%
- IL Tax Rate (Team assignment) = 4.95%
- $250,000 * 44.14% = $110,350 Tax Benefit at Risk
Open an Individual 401(k)
Endorsement income is classified as self-employment income (1099). This provides you with an opportunity to set up an additional retirement account called an Individual 401(k) that will lower the amount of taxes you pay today and offer you tax-deferred investment growth for years to come. You are eligible to contribute 20% of the 1099 income earned to an Individual 401(k).
Did You Earn a Full Year of MLB Service?
If you earned a full year of service, your team made a $48,000 contribution to your MLB Vanguard 401(k). The maximum combined contribution limit set by the IRS is $54,000 thus limiting your contribution to the MLB 401(k) to only $6,000 instead of the usual $18,000.
This creates an opportunity for you to make a $12,000 pre-tax contribution to an Individual 401(k) in addition to the 20% based on your endorsement income. As an example:
- $100,000 endorsement income earned
- $12,000 pre-tax employee contribution
- $20,000 pre-tax employer contribution
- $14,124.80 Tax Savings
WHAT SHOULD YOU DO?
If you have not prepared a year-end tax projection or opened an Individual 401(k) you are at risk of paying more in taxes than necessary. If you would like to setup a time to discuss your personal situation email us or schedule a time to talk.Schedule Your Call