Professional athlete residency is one of the hottest topics discussed among professional athletes. It is also one of the most misunderstood.
A change in residency, when done correctly and for the right reasons, may result in significantly lower taxes. However, if done incorrectly, it can be a financial disaster. Therefore, you would be wise to only take advice from a Certified Financial Planner (CFP) and Certified Public Accountant (CPA) who have the experience of helping athletes establish residency.
The days of merely using someone else’s address and getting a new driver’s license as a way to “claim” residency are over. States have become savvier and are proactive in securing what they believe is their rightful claim of an athlete’s income.
Why Residency Matters
As a taxpayer, you must pay income tax to your state of residence, unless the state (such as Florida, Texas, and Nevada) does not impose an individual income tax. Resident taxation subjects you to taxation on your worldwide income which includes all money earned from your team contract and off-the-field income (endorsements, appearances, etc.)
As an example, if you are a California resident (13.3% Income Tax Rate) but play for the Texas Rangers (0% Income Tax Rate) you still owe the full amount to CA minus any credit for state taxes paid while playing games in other states.
What Determines Residency?
In general, a resident is someone who establishes themselves in a place for other than a temporary, special, or limited purpose, with the intention of making that place their true, fixed, permanent home.
It is important to note that an athlete’s state of residence is not necessarily the same as his or her team state, even though they may reside in the team state during the season or even a majority of the tax year. A false misconception is that if a player spends 183 days in the state, they are considered a resident. Time spent in the state is a factor that is taken into consideration but not the sole criteria.
The determination of residency is based on facts and circumstances, including:
- Where do you return and stay after the official season ends?
- In what state was your driver’s license obtained?
- Where are your automobiles registered?
- Where are your social and community ties? (such as gym, club and other memberships)
- Where do you regularly attend religious services?
- Where are you registered to vote?
- Where is your mail delivered?
This list is not meant to be comprehensive. Many factors affect the ultimate determination of residency, and each situation is unique.
Download a FREE copy of “9 Steps to Establishing Residency.”
When establishing residency in the first year of a contract, it is important to note that the income must be received after the move to the new state has taken place. The case is strengthened by taking care of a few of the items listed above and documenting everything!
Every athlete should seriously consider the tax savings of appropriate residency planning. You should consult with an experienced CPA and CFP to determine if changing residency makes sense for your given situation.
We would be more than happy to discuss your specific situation and answer any questions you may have. Please contact us to set up a time to talk.