Star athletes are expected to put up big numbers on the field or in the arena -- and at tax time, as well.
According to certified public accountant Ryan Losi, who spoke with Yahoo! Finance, "Professional sports players get taxed by pretty much every city and state in which they play." (The Virginia-based accounting at which Losi is executive vice president, Piascik & Associates, represents more than 70 professional athletes.)
As a result, Losi says, "NFL players typically file in 10 to 12 jurisdictions. NBA is somewhere between 16 and 20. MLB is somewhere between 20 and 26, and the NHL is between 14 and 16."
Salaries are taxed, logically enough, in the city and state that host the team. But athletes profit in all sorts of other ways -- endorsement deals, personal appearance fees, dividends and interest income. Such earnings are taxed by the states in which the players live.
These rules can help determine where an athlete hangs his hat after taking off his helmet. Eli Manning, for instance -- New York Giants quarterback and two-time Super Bowl MVP -- lives across the Hudson from Manhattan, in Hoboken, N.J. "If he were a resident of New York, he'd pay 8.97 percent New York state tax and another 3.78 percent New York City tax on top of that, not only on his wage income but also his endorsements and investment interest," says Robert Raiola, CPA and sports entertainment group manager for a Jersey-based firm that represents more than 100 professional athletes. "In New Jersey, he only pays 8.97 percent."
In fact, Losi speculates that tax considerations might have motivated LeBron James to move to Miami instead of New York in 2010: Florida is one of nine states that do not have state income tax. "For him," Losi says, "it was an extra 5 [percent to] 9 percent difference in tax. That's real money."
The Tax Man Is Everywhere
Athletes who play all over the world -- like golfers and tennis players -- can be compelled to give up a third or more of their winnings to the local taxman. "Whenever they play in foreign countries, they have to pay taxes in that jurisdiction, and the tax liability is much bigger than the 5 [percent] to 10 percent state tax. It's usually in the 30 [percent] to 40 percent bracket," explains Losi. "Usually it's withheld in their prize money, and they can file a nonresident return if they think they might have a refund coming."
And since the U.S., unlike most countries, taxes all personal income, it actually makes sense for some international competitors to live outside America.
But it's certainly not all bad news for sports stars on the tax front. Athletes can deduct preseason training expenses like hotel, apartment or home rental, meals, transportation to training locations, and car rentals. They can also deduct the cost of fines imposed by their team or league; the latter usually go to charity. Also deductible is an agent's fee. But the value of gift bags and other freebies received at events like awards ceremonies must be claimed as income.
Craziest tax deductions
The Price of Sports Glory: Absurdly Complicated Taxes
Call it extreme communication. One taxpayer was so distrustful of technology that he wouldn't use a telephone or computer.
That posed a problem when it came to communicating with his business partner, who lived across town in Phoenix. So he came up with a plan: carrier pigeons.
The two now send messages to each other via the birds. And the technophobe thought it made sense to write off the pigeons, as well as their care, food and housing, as a business expense.
Shauna Wekherlien, the CPA at Tax Goddess Business Services who prepared his return, said she asked him a lot of questions (like whether he has ever owned a computer) to establish whether he had ever used technology to communicate with people in the past.
He said he hadn't, so she determined that the deduction was fair game, given that it was the only way he could reach his business partner.
A woman from Arizona actually tried to deduct the cost of her own baby.
Because she used photos of her child in marketing materials for her curtain and blinds business, she thought the money she spent on her baby's food, clothing, nanny, diapers and baby powder -- a total of about $26,000 -- should all count as deductible business expenses.
CPA Wekherlien, at Tax Goddess Business Services, said she was able to write off the cost of hiring the photographer who took the photos of the baby, as well as the baby's stroller and the onesies that carried the company logo (which pictured the baby), but the rest of the expenses weren't allowed.
Deducting the cost of your own hip replacement is one thing, but it's another to write off your dog's surgery.
When one client dropped off her tax information to Bruce McFarland, a tax preparer at L&R Tax Preparation in Missouri, he noticed that she had written off an unusually high amount of medical expenses, including $8,000 for a "family dependent" -- even though she had no spouse or children.
That "family dependent" turned out to be her dog. She considered the pooch such an important part of the family that she thought it would be legitimate to write off its medical expenses.
But because the animal wasn't a medical necessity for the taxpayer, McFarland couldn't let her deduct the cost of its surgery or any of its other expenses.
Watching your wife pole dance may be a good way to unwind from a long day of work, but it hardly counts as a business-related activity in the eyes of the IRS.
Nevertheless, one man tried to write off the cost of his wife's pole dancing lessons as a business expense under "meals and entertainment." The man explained that watching her dance was his post-work relaxation and made him better at his job.
Wekherlien, at Tax Goddess Business Services, said she had to remove the deduction from his return, informing the man that the $800 he spent on pole dancing classes would be swiftly denied by the IRS.
With the right prescription, even bottled water can be deductible. In fact, one very wealthy client managed to deduct $1,095 worth of Evian as a medical expense on her taxes.
Somehow, the woman had convinced her doctor to give her a prescription for three bottles of Evian water every day, said John Lieberman, a CPA at Perelson Weiner LLP.
Lieberman didn't ask her what the medical condition was that required her to drink only Evian water, but he said the deduction was permissible since it was actually prescribed by a doctor and she still had the prescription note for her files.
A real estate agent who was "a little bit big on the bottom", according to her tax preparer, bought a number of pairs of the slimming underwear called Spanx because she thought looking smaller would help her sell more houses.
The tax preparer, who asked to remain anonymous, said the woman also argued that wearing Spanx helped her to sit down more comfortably with clients. But the preparer had to axe the deduction since there was no hard proof it impacted her business or income, making it hard to qualify the undergarment as a business expense.
Certain drugs qualify as legitimate medical deductions. But when they're recreational drugs, like say cocaine or ecstasy, the expenses are a little harder to slip by the IRS.
Dave Spaulding, an enrolled agent at Janover LLC, a financial planning firm, said clients who were in a rock band actually tried to deduct an item labeled "drugs" as "travel & entertainment" expenses.
The total cost of the "drugs" was in the high five-figures, and the band didn't even try to disguise them as prescription or medical drugs.
"The band's bookkeeper had concluded that the cost of recreational drugs was necessary and ordinary," he said. "Apart from admitting to possession of illegal drugs, the IRS would strongly differ with their tax position."
Needless to say, Spaulding's firm removed the deduction from the band's tax form.
Several states have "community property" laws, which say that most income earned and most assets acquired during a marriage are the equal property of both spouses, regardless of whose name is on the check or the title. This can sometimes create additional work for couples filing separately for federal income taxes. The Internal Revenue Service (IRS) created Form 8958 to allow couples in community property states to correctly allocate income to each spouse that may not match what is reported to the IRS.
If you plan on claiming one of the IRS educational tax credits, be sure to fill out a Form 8863 and attach it to your tax return. These credits can provide a dollar-for-dollar reduction in the amount of tax you owe at the end of the year for the costs you incur to attend school. Before preparing the form, however, make sure that you satisfy the requirements of an eligible student.
If you're going through a divorce, taxes may be the last thing on your mind, so we're here to help. We've got tips for you on which filing status to choose after the divorce, who can claim the exemptions for the kids, and how payments to an ex-spouse are treated for tax purposes.
Virtual currency like Bitcoin has shifted into the public eye in recent years. Some employees are paid with Bitcoin, more than a few retailers accept Bitcoin as payment, and others hold the e-currency as a capital asset. Recently, the Internal Revenue Service (IRS) clarified the tax treatment of Bitcoin and Bitcoin transactions.