LeBron James’ state income tax attorney might
have saved LeBron millions of dollars a year by employing one of the best state
income tax strategies around. Lets take a peek at the King James
playbook of state income tax strategies.
CHOICE OF STATE
INCOME TAX STRATEGIES
Like LeBron James and others you can likely better
play the game of state income tax strategies.
As a free agent, LeBron had options. He could go wherever he thought
he could win a title, get the most money in endorsements, where he could
enjoy the best Cuban food and beach lifestyle, and maybe all three. After
being courted by half a dozen teams, he had some really nice offers and some
potentially lucrative deals. The biggest players were Cleveland, the New Jersey Nets, New York Knicks, maybe even the Bulls or the Clippers and of course Miami. LeBron finally picked Miami. Miami
could arguably offer a lot, but I wouldn’t doubt that his state income
tax attorney whispered a few sweet words into his ear about income tax
strategies, like “$2-5 million a year,” that may have influenced
his Decision.
HOW STATE INCOME
TAXES ARE CALCULATED
In fact, in the clip above from the Decision, LeBron
said one little thing that might cost him over $2 million a year.
States all calculate their state income tax slightly differently but
in general, the state where you have your tax domicile will collect income
tax on all of your income. If you earn income while in some other state, you
may have to pay income tax to that state for the amount earned there. So for
NBA players like LeBron, he pays state income tax on his salary for 41 home
games to his home state, and state income tax to the various states where he
plays 41 away games. His endorsement income is probably taxed by his state of
domicile.
So what does LeBron make? On average, about $32
million a year in endorsements. This might go up if he wins a championship or
might go down if he is caught with his pants down like some other athletes,
but we will assume it stays the same. His contract with Miami was for about
$110 million for 5 years. Of course there are bonuses, different options, buy
outs etc., but we will assume a simple average of $22 million each year in
salary, 1/2 of which will be played on his home court.
So, if you are keeping score at home, that is about
$44 million a year that will be taxable in LeBron’s state of domicile.
COMPARISON OF
STATE INCOME TAX STRATEGIES
What would LeBron’s income tax strategies have
cost him if he picked one of the other teams?
Cavaliers – (Ohio) 6% state income tax rate – $2.6 million per year
in state income taxes.
Bulls – (Illinois) 3% of Federal AGI – $1.65 million per year
in state income taxes.
Knicks – (New York) 7% state income tax rate – over $3 million
per year in state income taxes.
Clippers – (California) 10.5% state income tax rate – $4.6 million
per year in state income taxes.
Nets – (New Jersey) 11% state income tax rate – over $4.8
million per year in state income taxes.
So what is his state income tax bill in Florida as a Miami Heat? Z-E-R-O. That
means that by simply playing for a team based in a state with no income tax
he will be saving anywhere from $1.65-$4.8 million per year! SCORE! Over the
course of his 5 year contract he could be saving anywhere from $10 –
$22 million without considering compounding interest.
This is of course assuming that LeBron properly
changes his tax domicile to Florida. Ohio will not be a gracious loser of
more than $2 million a year in tax revenues. You can bet that they will
pressure King James to make sure his state income tax attorney crossed the
t’s and dotted the lower case j’s to be domiciled in Florida
rather than Ohio. In fact, in the clip above from the Decision, LeBron said
one little thing that might cost him over $2 million a year. So much for
clutch play. I don’t want to tip off the state of Ohio so I will let
you discuss what that was with your income tax attorney.
OTHERS EMPLOYING
STATE INCOME TAX STRATEGIES
LeBron isn’t the only person to change
domicile to save a ton in taxes. Tiger Woods moved his tax domicile from
California to Florida very early in his career. He is estimated to have
earned about $1 billion over the course of his career so far, a savings of
about $100 million. He might want to use that $100 million to buy a giant
“I’m sorry” diamond for his wife, or maybe an
“I’m sorry” island. Lots of wealthy New Jerseyans have also
“vanished” from New Jersey.
HOW CAN REGULAR
FOLKS USE THESE STATE INCOME TAX STRATEGIES?
So what if these guys are saving millions of dollars
a year. Most people don’t even make as much as those guys are saving,
so why bother? You may not make $54 million a year, or even $4 million a year
but it is likely that you are making closer to the NBA league minimum of
$475,000 a year. If you earn that much being domiciled in Ohio you might be
spending about $28,500 a year in state income tax, in New York $33,250, in
California, even in a lower tax bracket of 9.55%, you would owe about
$45,000, and in New Jersey $52,250. Still
not worth your trouble to think about where you are domiciled?
CONCLUSION
Like LeBron James and others you can likely better
play the game of state income tax strategies. Your tax domicile can mean
thousands of dollars more in your pocket each year. But states hate losing
milk when their cows escape from the pen. Talk to your state
income tax attorney to make sure you correctly and legally change
your domicile.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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