As a professional athlete, there are several planning strategies you can take advantage of that can potentially save you thousands of dollars, which is why it’s important to find a qualified Certified Public Accountant (CPA®) who specializes in working with athletes.
The most common mistake we see players make is waiting until after the year is over to address your tax and financial planning needs. Unfortunately, once the clock strikes midnight on New Year’s Eve many of the tax savings strategies will no longer be available to you.
Before year end your CPA® should evaluate the following planning opportunities:
1. Unreimbursed Business Expenses
One of the most important ways to save on taxes is to properly track your business expenses. Your accountant’s ability to prepare your returns is only as good as your records. When you miss a business expense, you are forcing yourself to pay more in taxes.
Most common missed deductions
- Review a copy of your last paystub. There are deductible tax items included on your paystub that are not included on your W-2.
- Spring training & instructional league housing is considered temporary and dedctible.
- If you spent time between different minor league teams your temporary living expenses (rent, travel, etc.) may be deductible.
Review our list of what is tax deductible to ensure you are maximizing every deduction.
2. Timing of Itemized Deductions
Implementing a “skip year” strategy whereby itemized deductions are accelerated or deferred to maximize tax savings. “Bunching” deductions such as sports advisor fees could create more benefit due to limitations placed on these types of deductions. The timing of these payments should always consider Alternative Minimum Tax (AMT), current tax rates and total deductions in all planning years.
3. Retirement Plan Contributions
Earning endorsement income (card deals, appearances, equipment deals, etc.) is not only great because it’s extra income, but also because it provides you with the opportunity to pay less tax today and maximize your tax-deferred investment growth, ultimately helping you accomplish your financial goals more effectively.
Endorsement income is classified as self-employment income. This provides you with an opportunity to set up additional tax-advantaged retirement plans that will lower the amount of taxes you pay today and offer you tax-deferred investment growth for years to come.
It is important to coordinate a meeting with your Wealth Manager to discuss the benefit of contributing to a qualified retirement plan (Individual 401K or SEP IRA).
4. Prepare a Duty-days Schedule
As a professional athlete you are subject to income tax in the states in which you play. If this was not bad enough, many municipalities also have an Income Tax and filing requirements. For every dollar you earn, ‘duty days’ are assigned for the proportion of official days you are in various states (or cities).
Unfortunately, the Form W-2 you receive during tax time does not always reflect the proper allocation of days which can result in you paying more tax than you actually owe.
It is critical for your CPA to prepare a duty-days schedule that includes all official team events (spring training, instructional league, off-season camps) and any time spent on the disabled list.
5. Avoiding or Minimizing the Alternative Minimum Tax (AMT)
Professional athletes almost always fall victim to the Alternative Minimum Tax. Proper, thoughtful planning for AMT can help minimize or in some cases, avoid the tax altogether.
6. Properly Minimizing State Income Tax
One of the more complex tax issues an athlete deals with is state income tax compliance. Proper allocation of income to each state is vital in minimizing your state income tax burden, in addition to determining whether a filing requirement exists due to de minimis exceptions and reciprocal agreements. Multi-state taxation is complex and not all tax preparers are familiar with this area of taxation. Make sure your CPA has the experience to properly prepare ALL of your income tax returns.
Many of these strategies can be overlooked when it is time to file your tax return leaving legitimate deductions or credits on the table and causing you to incur assessed deficiencies, penalties and interest that otherwise could have been avoided. You should be talking to your CPA throughout the year, not just when you drop off your information at the beginning of the year.