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
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
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 Jersey-ans 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?
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.