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? Believing this is non-negotiable.
To add to the complexity, the recent tax changes completely changed what we have been recommending over the past decade. What was historically the worst advice may turn out to be the best advice going forward.
Your taxes can vary greatly depending on many factors including the language of your contract, the timing of payment, and residency. All of these factors come into play when determining your final tax liability, and no two cases are the same.
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?
Let’s use the following assumptions:
- Team: Atlanta Braves
- Year 1 Assignment: Orlando, FL
- Year 2 Assignment: Rome, GA
- Resident State: FL (no income tax)
- $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
As you can see, the typical 50/50 split is actually the least advantageous decision.
It’s important to clarify that these calculations are overly simplistic. They do 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 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.
It’s not what you sign for that matters but what you put in your pocket.
If you are interested in a complimentary analysis of your potential situation, please contact us, and we will respond within 24 hours.