State Residency is one of the hottest topics amongst professional athletes. It is also one of the most misunderstood. The days of simply using someone else’s address and getting a new driver’s license as a way to “claim” residency are over. States have become more savvy and are proactive in securing what they believe is their rightful claim of an athlete’s income.
Where you live can have a dramatic effect on your overall tax situation. Income tax rates vary by state, with a handful of states currently having no income tax. Many localities and cities are now also taxing income. Professional athletes are subject to taxation in each jurisdiction in which they perform services, making the selection of residency an important planning tool, depending on the source of income.
The team will typically withhold state tax of the team state the player is assigned to. In cases where the team state is a “no income tax” state, the team will not withhold any state tax, which could result in a surprise and lost deductions when the resident return is filed. State taxes need to be considered not only for your resident state but also in the state or states you play in during the season. Both need to be planned for in order to maximize the benefit and reduce your overall tax liability.
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. The determination of residency is based on actual facts and circumstances, including:
- Where do you return and stay after being away?
- 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 do your banking?
- Where do you go to church?
- 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 our AWM Taxation of Professional Athletes – Residency Documentation
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. Taxpayer’s may change their state of residence at any time, but can have only one place of residence at a time, even if they own and live in more than one household at a time.
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! Keep receipts and copies of everything to show the intent to move permanently to your new state of residence.
A change in residency should not be done strictly as a tax planning tool because of the permanent nature of such a move. However, when done correctly and for the right reasons, the tax impact can be significant. There are many steps to be documented along the way and additional planning opportunities even if the move is not executed in the first year of a contract, so if a move is being considered, you should consult with a Certified Public Accountant (CPA®) who specializes in athlete taxation well in advance to ensure that the change is legitimate and the benefit is recognized.
We would be more than happy to discuss your specific situation and answer any questions you may have. Please contact us to setup a time to talk.