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Biggest Winner from LeBron to LA? The California Franchise Tax Board

08/01/2018

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By Caleb Alexander, Tax Senior

In response to a California Democratic Party Tweet welcoming Lebron to the neighborhood, Republican Devin Nunes, R – California, tweeted “LOL! Prepare to pay the highest taxes you ever have in your career!!! You should have held out for more just to afford the Moonbeam weather tax!!!”

The NBA’s four-time NBA MVP, three-time NBA Finals MVP, fourteen-time NBA All-Star and three-time NBA Champion has signed a four-year contract with the Los Angeles Lakers. Notorious for his dramatized announcements, LeBron anticlimactically announced his next destination via Twitter. The four-year contract worth $153.3M will pay James roughly $500,000 per NBA regular season game in the final year of his contract.  While the annual salary amounts are similar to his time in Cleveland, how much of his new contract will he see once the California Franchise Tax Board takes their cut? 

The Weather Tax

The Weather Tax refers to California’s high taxation rates, which some say is the cost of its year-round great weather. The maximum state income tax rate is 13.3% in California versus 7.497% in Ohio. That is an increase of 5.8% before factoring in any increases in property tax or sales tax.

For everyone, not just athletes, the reduction in the state and local tax deduction under the Tax Cuts and Jobs Act could be a brutal hit. The state and local income tax deduction will be limited to just $10,000 beginning in 2018.  Of course, that didn’t change with Lebron’s move to California but he will likely feel it more.

Given the tax rates above and considering the deduction for state income tax under the old tax law, the “feels like” tax rate in Ohio was closer to 4.5%. Lebron will reportedly make $38,325M on average over the 4 years in California. Assuming he is a California resident, he will pay close to $5.1M a year in state income tax. On the same income under old law in Ohio, this would have felt like closer to $1.725M– an increase of 8.8% in state tax.

Lucky for Lebron, the new tax law also decreased the maximum Federal income tax rate. Even still, Lebron will likely be paying 51% in combined Federal & state income taxes versus the 45% under prior tax law in Ohio. An increase of 6% or $2.3M per year. 

Tax Rate of Divisional Foes

Another increase in tax Lebron may not have considered is the so-called “Jock Tax.”  James will pay taxes to the state of his opponents for all away games. The move to California changes the state/local income tax rate for the teams he plays most often throughout the season. He will transition from an average income tax rate of 5.32% in the Central Division to having three teams within his division from California and thus raising the average to 11.11% in the Pacific Division.

What about his moving expenses?

Beginning in 2018, James can no longer deduct the moving expenses related to his move to Los Angeles as an itemized deduction on his federal tax return. The Lakers could reimburse him for the expenses of the move but contrary to prior years, he would need to recognize the reimbursement as income.

Don’t sign over that check just yet, Lebron…

It is interesting to consider LeBron reportedly did not become a resident of Florida during his 4 Season stint with the Miami Heat. Considering Florida has a 0% state income tax rate, Lebron either had too many residency factors in Ohio or perhaps ignored the advice of his CPA.

It is possible Lebron could move teams but still have a case for residency in Ohio or perhaps another state. Artists & athletes routinely make a case for residency in a no or low-income tax state. So, it is possible to play for a California team and be a nonresident of California. Lebron supposedly owns property all over the country, including a home in Los Angeles. There are numerous factors that go into domicile, but it’s certainly worth a few hours spent with a good attorney and a CPA. 

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

Posted in: Wealth Management, Tax