It’s not what you sign for that matters but what you put in your pocket.
As a player, your ultimate goal is not the gross MLB signing bonus amount; rather, it is the net (after-tax) amount.
Are you familiar with how an MLB signing bonus is paid out?
Historically, teams have split the gross amount into two equal payments over two years. The most costly mistake is believing that the 50/50 payment structure is the only option.
The major factors that will determine the optimal structure are:
To add to the complexity, the recent tax changes completely changed what we have been recommending over the past decade.
All of these factors come into play when determining your final tax liability, and no two cases are the same.
SIGNING BONUS EXAMPLE: $119,760 TAX SAVINGS
Which option would you choose if you signed for $5,000,000?
- Option 1: $5,000,0000 paid in year 1
- Option 2: $2,500,0000 paid in year 1 & $2,500,000 paid in year 2
- Option 3: $4,500,000 paid in Year 1 & $500,000 paid in year 2
You are receiving the same gross amount in all three options so is there a best option?
- $5,000,000 paid in yr. 1 will result in $1,934,910 Total Tax
- $2,500,000 even payments will result in $2,051,961 Total Tax
- $4,500,000 paid in yr. 1 & $500,000 in yr. 2 will result in $1,932,201 Total Tax
Assumptions (Team ATL, Assignment: YR 1 – FL / YR 2 – GA, Residency: FL) Calculation does not include the added complexity of additional income from endorsements, retirement plan contributions, specific tax planning strategies such as duty days or the time value of money.
As you can see, the typical 50/50 split would have cost our client an additional $119,760 in taxes.
As we mentioned above, there is a significant misperception that the structure of your signing bonus is non-negotiable. Over the past decade, we have worked with over 50 1st Round draft picks and their agents to negotiate the most tax efficient payment structure. Unfortunately, we see players lose out on significant savings every year due to a lack of proactive planning. Below are the three most common reasons below.
- Your agent is telling you not to worry about a financial advisor until after the draft
- Your agent tells you a team will not negotiate the structure of your bonus
- Your signing bonus payment is being split 50/50
Many families ask, “doesn’t my agent do this?”
The best agents recognize the importance of tax planning and will request the support of a Certified Public Accountant (CPA) who specializes in working with professional athletes. However, agents are equally cautious to keep themselves separate from a player’s financial decisions to avoid any potential conflicts of interest. This puts the responsibility on the player and his family to ensure the tax planning is happening.
This is a financial decision with real consequences. If you are interested in a complimentary analysis of your potential situation, please contact us.