As you know, tax reform is being hotly debated in Congress right now. Both the House and Senate have passed versions of a tax bill and efforts to reconcile them are underway. There are 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.
HERE ARE THE MOST IMPORTANT PROPOSED CHANGES:
STATE AND PROPERTY TAXES
- Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.
- Proposed: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes.
- Why this matters: As an athlete you pay taxes in multiple states. Historically, you received a deduction on your Federal Tax Return for making these payments. If the proposed change takes place you will lose this benefit, ultimately, increasing your tax liability.
- Current law: itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
- Proposed: to eliminate all individual tax deductions except for those that incentivize home ownership, charitable contributions and retirement contributions.
- Why this matters: This is another big negative hit to you as athlete. You will no longer be able to deduct (write-off) agent fees, training expenses, union dues, clubhouse tips, travel expenses, etc.
MORTGAGE INTEREST DEDUCTION
- Current law: Deductible mortgage interest is capped at loans of $1 million.
- Proposed: Deductible mortgage interest for new purchases of homes would be capped at loans of $750,000.
- Why this matters: Clients who obtain a mortgage will not be able to deduct (write-off) any interest on a mortgage above $750,000.
FEDERAL TAX BRACKETS
- Current law: Top individual tax bracket is currently 39.6% for individuals who earn $418,401 and more and married couples, filing jointly who earn $470,701 and more.
- Proposed: Top individual tax bracket would decrease to 37% for individuals who earn $500,000 and more and married couples, filing jointly who earn $1,000,001 and more.
- Why this matters:the top rate will be decreased by 2.6% which could potentially reduce your overall federal tax liability.
- Current law: Applies a 40 percent levy on estates worth more than $5.49 million for individuals and $10.98 million for couples.
- Proposed: Double the thresholds so the levy applies to fewer estates. The higher thresholds would sunset in 2026.
- Why this matters: This is potentially one of the greater benefits you will receive from the proposed changes. Currently, when you pass away if your net-worth is greater than $10.98 million your estate will pay 40% on every dollar above that amount. The proposed change would increase that number to ~$22 million eliminate the 40% tax on an additional $11 million.
TIME-SENSITIVE ACTION ITEMS THAT MUST BE COMPLETED BY DECEMBER 31ST.
The #1 most important action step you can take TODAY is to have a CPA prepare a final tax projection before year-end. The 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). We cover the 3 actions you should take before the end of the year in our article, “2017 Year-end Tax Savings Plan.”
As a professional athlete the proposed changes deserve a mixed review. There are a few changes that you will definitely benefit from and a few others that are going to hurt. The main takeaway is that this only enhances the importance of the proactive tax planning we do for you. If you have any questions please don’t hesitate to reach out to us.