OT: LeBronomics: Could High Taxes Influence James' Team Decision?
I know, another LeBron post, but I thought this one deserved it's own thread because of the interesting (and different) debate that it could spark for those of us on the "tax nerd" side of things (and I know there are a lot of us who post here...). The key quote:
“On a five-year contract worth $96 million -- what he'd get from the Knicks or the Heat -- LeBron would pay $12.34 million in New York taxes.” Florida has no state income tax.
New Jerseyand Ohio, the other reported frontrunners to attract James, also have state income taxes, but they are not as his as in New York. Based on a $96 million contract, James would pay $5.69 million in state taxesif he re-signed with the Cleveland Cavaliers. If he signed with the New Jersey Nets, James would pay $10.32 million in state taxes.
http://www.businessandmedia.org/articles/2010/20100708120415.aspx
Discuss.
which I'm sure it is, he would be extremely remiss NOT to consider the income tax issue.
Obviously the State Gov't gets funding some how (e.g. Sales and Use Tax, Property tax, Intangible tax.) Does anyone have any references or thoughts on how they balance out in FL as compared to other states?
Comparing tax liability in states with heavy income taxes vs no income taxes can be huge, particularly for individuals with large incomes. Assuming a 6 percent income tax (Ohio?) vs none (Florida), you are looking at a savings of 600,000 per year just on state income alone for every 10 million in income. For a five year contract, at 15 million per year, that's a savings of 4.5 million. That's not chump change unless you are Larry Page or Bill Gates.
This is easy stuff for any serious financial advisor.
Then there is the small difference of cruising South Beach or Cleveland in February. That's a tough one to call.
Taxes they collect from tourist.
This has always been my understanding, that they collect substantial taxes off of hotel rooms and that sort of thing.
Florida receives tax revenue from most of the run of the mill sources that almost every other state does, but it has certain things that aren't taxed that are in other states (e.g. property tax, tangible personal property, and income of natural citizens).
Property taxes are nuts down here.
Indeed they are, but property taxes in Florida are county and local taxes, not state taxes. Florida's Constitution actually prohibits assessment of taxes against real property by the State.
no. he makes a shitload of money. i doubt he really cares about his taxes.
yeah, b/c rich people NEVER care about their taxes
This is a joke, right? Trust me when I say that people who make that much money are the precise people who DO care about their taxes.
...of athletes set up their homes in Fl because of the lack of state tax. They aren't doing it for the humid weather..though that's aperk for some.
When the hell are the Nets moving to BK? Nevermind, I really don't care.
Interesting points raised, you'd have to wonder how the Knicks/Cavs overcame this financial disadvantage. Someone like Lebron (Global Brand) wouldn't be impacted necessarily by "Local Market" endorsement deals, so how would they counter?
I can only imagine if there were no salary cap and the Steinbrenner's owned the Knicks.
If there were no salary cap he'd be playing for the Nets. The new owner has more money than the Steinbrenners and King Midas combined.
Touche. But what if the Steinbrenners offered the Yankees organization to Lebron for a 5 year deal?
The Nets have Jay-Z who can "make a Yankee hat more famous than a Yankee can."
I'm a fan of his. Like many of us, I hear he also "bleeds blue."
but he's not a crip though
I never really thought of that. I wonder if that will be offset by having to share the spotlight (losses in local endorsements and such). Anyway, at minimum its part of the economic picture for sure.
If he is that concerned about taxes (meaning purely end-of-salary money), wouldn't re-signing with the Cavs make the most sense if we arent talking about endorsement potential or actually, you know, winning basketball games? The article cites the $96 million as the basis for the taxes in Cleveland simply because its easier to compare across several cities using the same number, but since Cleveland can offer a larger contract than any other team presumably Lebron would make more going to Cleveland and paying state taxes than going to Florida and not paying state taxes.
Well, maybe (maybe not). It would depend on where he decides to make his permanent residence since a large portion of his income comes from endorsements and sources other than actually playing basketball.
At least in terms of Cleveland, he'd make up for that hit by earning an extra $30 million in salary, but overall a good point.
I am still holding out hope as a Knicks fan that he comes to New York. Otherwise, I'm negbanging Jared Dudley.
Apparently, it's not looking good for the Knickerbockers.
http://twitter.com/Ian_OConnor
reading body language here at #Knicks presser in Garden, Mike D'Antoni is pretty much resigned to defeat on the #LeBron front
Only a matter of time until he's resigned to defeat on the MSG basketball court...
Lebron could become the face of basketball history if he went to New York. He could market himself in ways he could nowhere else (bringing back basketball in the greatest city/arena in the game, restoring glory to a historic franchise etc.) The marketing and endorsement earnings would FAR outweigh the tax differential..
This is a valid point, but professional athletes are not taxed like you and I. Professional athletes travel constantly and "earn" a portion of their salary in different cities across the US throughout their respective seasons. They are taxed by each state they play in, as well as municipalities w/ a local tax on income. Granted home games played in a given location make up 50% of that equation.
Also consider that Florida has been a popular place for primary homes of pro athletes because of the tax planning available (i.e., taking the position that a larger portion of their salary is earned in Florida over other states). Meaning, the location in which each athlete plays his home games doesn't necesarily play the largest role in his income tax bills because of endorsements and other cash flows that aren't necessarily "earned" when they are actually playing a sport.
Lastly, state/local income taxes are deductible for federal tax purposes.
Lastly, state/local income taxes are deductible for federal tax purposes.
Think about that point a little more. Just for a minute.
I think he's actually correct so I'll attempt to have his back here with the hopes that I'm not terribly off-base. I believe what he is saying is:
Hypothetical salary of $40000 (using small and easy numbers for the example):
0% state tax: $40000
25% federal tax: $40000-$10000=$30000 = end of tax money in the bank.
OR
10% state tax: $40000 - $4000 = $36000
Deductible applied towards 25% federal tax: $36000 - $9000 = $27000 = end of tax money in the bank.
So while the state tax of $4000 would lead you to believe that LeBron would be out $4000 for playing in New York instead of Florida, in reality he only ends up losing $3000 due to state taxes because they are deducted from his income.
Your analysis is essentially correct, with the exception that $4,000 in state taxes paid does not have a $4,000 effect on your taxes. Regardless, it's still a loss of money, which is why it's silly to say that someone should go where the taxes are higher. All the deduction basically does is reduce your adjusted gross income by the amount of the deduction. It's a deduction from your income upon which you are taxed, not a deduction from the federal taxes that you will owe (that's a credit).
So you are bascially agreeing with my point immediately after making a sarcastic comment implying I was wrong?
Where in my post did I say state/local taxes are creditable?
I thought it was obvious that going to where the taxes are higher just so you can get a deduction for them is an idiot move.....sorry for making that assumption I guess?
So you are bascially agreeing with my point immediately after making a sarcastic comment implying I was wrong?
I never implied that you were wrong. I just asked that you think about it a little bit more. Primarily because it's not as big of an impact as most people think. I'm sorry that you took that as implying that you were wrong. I realize now that I could have worded what I was trying to get at there quite differently. Sorry about that.
Where in my post did I say state/local taxes are creditable?
You didn't. I was explaining the difference to the person I was responding to, as well as to anyone else who might have read it. Education is good.
I thought it was obvious that going to where the taxes are higher just so you can get a deduction for them is an idiot move.....sorry for making that assumption I guess?
Yeah, I apologize. I thought you were being serious. It is obvious, but you would be SHOCKED at how many people think that's actually good idea. It happens all the time with the home mortgage interest deduction. That's the reason I said to think about it a bit more.
K...I thought about it.
See IRC Section 164(a)(3)...
(a) General rule
Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:
.....
(3) State and local, and foreign, income, war profits, and excess profits taxes.
Oooooohhhh......TAX BURN.
[EDIT: This came off as really douchy...I was sort of playing on the nerdiness of arguing tax implications of Lebron's decision. Carry on.]
So it's clear, the whole point of my original post above was that the NY Post's "tax" analysis was pretty short-sighted and left out a lot of information. They are basically assuming he gets taxed at X% of his income in NY or elsewhere compared to 0% in Florida...end of story. The truth is the differences in after tax income between the two options will probably be much closer than their sensationalist story implies...
I agree with what you've said in these posts, with the exception that I would disagree with your last sentence (i.e. "he two options will probably be much closer than their sensationalist story implies"). While the deduction can be substantial, at most it will reduce his federal taxes by about half of the taxes paid to New York, which still results in a quite hefty overall tax bill paid to New York.
Yes, but again, that is assuming all of his salary is deemed earned in NY. If he was a knick he would play several games against the Magic and Heat, for instance, so that portion of his salary will be deemed earned in FL and not be subject to income tax. The Post implied that he would pay 12% (or whatever it was) of his entire salary to NY State in income tax....the truth is he will only pay 12% on the amount he earns in NY.
That, combined with the deductibility of those taxes AND the fact that he may not have his primary residence in NY (which would allow him to "earn" his endorsement $$$ outside of a high tax state like NY) could bring that large difference down substantially.
Anyway...we're arguing the same point I think. It's all relative. Can I actually call this work since I'm a CPA? Let's get more of these discussions on MGoBlog so I don't feel so bad about it during the workday...
Yeah, I know, but approximately 50% (give or take depending on playoff games) of it would be earned in New York. So yeah, you're right in that the burden is less than the article implies, but it's still a much larger chunk of change than it would be if he played his home games in Florida. You are definitely right, however, in pointing out the over-simplicity of the tax discussion in the article.
EDIT: One thing to think about, however, is that he if here were to play his home games in Florida he would probably play well over 60% of his games in income tax-free states (Orlando, Miami, Memphis, Houston, Dallas, and San Antonio).
Anyway...we're arguing the same point I think. It's all relative. Can I actually call this work since I'm a CPA? Let's get more of these discussions on MGoBlog so I don't feel so bad about it during the workday...
Works for me!
Orlando isn't a state.
Someone had to say it.
This discussion has been picked up by various media sources (WSJ, Rush Limbaugh) as further evidence that our best and brightest are migrating to States with lower or nonexistent state income tax rates, and therefore if high tax states (New York for exapmle) want to keep up, they will have to lower their tax rates. And yes, these discussions often leave out a great many facts that are relevant, as you just mentioned above. For instance, many regions in Florida, particularly Miami-"Wade" county have seen double digit increases in their property tax rates. Combine that with ridiculous premiums paid by property owners for Hurricane Insuance (paid to the State, mind you), you have a system that for the home owning middle class does not represent sunstantial tax savings. Although for the hyper rich, such as LeBron, it would present an opportunity for significant tax savings, since neither property taxes nor hurricane insurance are progressive based on income.
also has high city taxes, if he decided to live there. 3.7% additional income tax. Of course, then you get to live in NYC, which I did for three years. And in my opionion, it was worth every penny. Best city I have ever been in.
Maybe I'm alone in this, but LeBron already has a ridiculous amount of money, and wherever he goes he is guaranteed to get a max deal, coupled with the fact that he will gt even more endorsement money, and so at this point in his career, LeBron is totally focused on winning. He's already won an MVP, he has already lead the league in scoring, and he is widely considered the best basketball player on the planet. It's not about stats or money. It's about winning.
I don't know if anyone else saw the Michael Wilbon interview with DWade and Bosh, but they both said they will take less money because they want to win. They want Miami to have more money under the cap to sign a few solid veteran role players and they are going to leave money on the table to prove that it's all about Ws.
I think LeBron is well aware that he has accomplished everything he can, individually, and his decision will come down to which team he feels will allow him to win the most championships. It's going to be either Miami or Chicago.
I read this morning that if Lebron goes to Miami he's going to have to take a smaller salary than D Wade. If that's the case, I don't know if he'll do it. Lebron has a big ego and that would probably be a hard pill to swallow...
...he'll make up in endorsement deals that will make Wade cry with envy.
That actually brings up another interesting point in this tax discussion. He said last night he intends to maintain his "home" in Akron. We'll see if he actually keeps Akron has his personal residence or if he just maintains a house there once he realizes that keeping Akron as his personal residence would expose all of his endorsement deals to Ohio's state income tax.
From a tax planning perspective, the benefits of maintaining his home in Akron (in order to have his home be classified as a homestead there, and presumably so that he could vote there as well) would be practically nonexistent compared to the benefits of not having his income subjected to state income tax. If LeBron's tax accountant told him to maintain Ohio as his state of residence, said tax accountant should be shot.
Yeah, keeping Akron as his personal residence would be an absolute planning failure. No doubt about that.
As for homestead, he'd be better off to have his personal residence and take advantage of Florida's homestead exemption. Much more wealth friendly.
If you think that LeBron James is "totally focused on winning," you've obviously never listened to the man's plans for himself.
Compare his demeanor and actions with those of Kevin Durant, and get back to me on who is "totally focused on winning."
Totally, completely, absolutely, 100% ,different personalities, but that doesn't mean Durant is any more focused on winning than LeBron. Look at Shaq, look at MJ, even before they won anything they were still the same larger than life, type A, personalities. Sure it might bother you that LeBron is more in your face than Plastic Man, but I don't equate that with lacking a desire to win.
In fact, regardless of personality, Durant and LeBron both have one thing in common, and that being they both have yet to win anything.
LeBron James is more concerned with becoming a global icon than being "totally focused on winning."
This isn't worth arguing about because I don't care. LeBron is now in the rarified air of Terrelle Owens, Brett Favre and A-Rod of ego-centric fools who I prefer to ignore.
At least Favre accomplished something. The self-proclaimed King? Well, nearly half his career is over and not a single title. Even if he wins two or three in Miami, everyone will say "how could they not win with all the talent on that team" and it still be be less titles than MJ, Kobe, Russell, Dr J and a couple dozen other players.
Don't get me wrong, LJ has phenomenal raw talent but he has not grown much as a player since the day he joined the NBA. He could go down as just another amazingly athletic player instead of what he should have been -- the best of all time.
And, sorry, but TO? TO has become a joke. He will be a controversial candidate for the HOF, at best, which considering his talent is sad.