Tax Write Offs For Athletes

What expenses can athletes write off on their taxes? If you’re like many athletes, this is one of the most confusing parts of filing your income tax return.

A write-off, or tax-deduction, is any legitimate expense that can be deducted from taxable income on your tax return. The purpose of a write-off is to lower your taxable income, thus reducing the amount of tax you owe to the federal and state governments.

As a professional athlete, your after-tax income is affected by many factors, including jock taxes, where you live, and tax deductions. Asking a wealth management team to help you with these questions can make a big difference in your net worth.

In this article, we’ll cut through the confusion about tax deductions with an up-to-date list of what’s deductible and what’s not.

We’ll also explain how tax deductions work against different types of income, so you can make sure you’re taking advantage of every write-off available to reduce your taxes.

How Tax Deductions Work

The most important item to note – we all pay taxes based on our total income. In the accounting world, this is called taxable income.

For example, if you have a taxable income of $500,000, a $1,000 charitable contribution would lower your taxable income to $499,000. The tax rate at this income level is 37%; therefore, the tax due would be reduced by $396. As a result, the net cost of your charitable contribution is $604 instead of $1,000.

A write-off is an expense that reduces your taxable income, and thus the taxes you pay to both the federal and state governments. Needless to say – it matters immensely what a write-off is and what it isn’t.

To give you an example, let’s review the impact of a write-off, assuming you’re in the highest tax bracket. Below is an illustration of how a $50,000 write-off can impact your tax payments:

Let’s assume that the write-off was a charitable contribution of $50,000. By using this to reduce your taxable income, you’ll pay $20,000 less in taxes at the 40% tax rate.

As a result of the savings, the actual cost of your charitable contribution is $30,000 instead of $50,000.

How Is a Professional Athlete Taxed?

An athlete usually has two streams of income, which are categorized differently for tax purposes. Each stream has different allowable tax deductions.

As a professional athlete, you earn money through salary and marketing deals.

1) Salary earned from the team

All professional baseball players are treated as employees by their respective teams. The same is true for professional athletes in other leagues. Teams in the NFL, NBA, and NHL pay their players as employees.

This statement is important to note: As an employee, unreimbursed business expenses are not tax-deductible.

Translation: Any expenses you’ve had to pay as a player on the team (training costs, agent fees, union dues, etc.) that the team does not reimburse you for are NOT tax-deductible. These expenses were tax-deductible prior to 2017 when they made up athletes’ largest deductible expense.

Depending on the wording in your contract, your signing bonus may also be considered part of your salary by the IRS. Talk to a CPA who can explain how signing bonuses are taxed and help you structure bonus payments to lower your taxes.

2) Income earned from marketing and endorsements

The IRS looks at your marketing and endorsement income differently than your salary earned from the team. In this income stream, you’re treated as a business owner. This makes all costs related to earning income for marketing and endorsements tax-deductible.

For example, agent fees paid for marketing deals are tax-deductible and reduce the taxes you pay on marketing income. One important factor – you cannot deduct the agent fees paid for your contract negotiation against your marketing income. Your costs need to follow income streams to determine if they’re a tax-deduction or not.

If you’re earning money through sponsorships and endorsements, keep track of your business expenses. This applies to amateur athletes as well, since Name, Image, and Likeness (NIL) deals can be a significant source of income at the college level.  

What Is Tax-Deductible?

To clear up any confusion about what is deductible on professional athlete taxes, here’s a list of expenses you can deduct from your salary income:

• Charitable contributions (cash and non-cash)
  • Contributions made to qualified organizations and Donor Advised Funds are deductible. This includes both cash and non-cash items such as clothing, equipment, etc.
• State, City & Local Income Taxes (SALT Deduction)
  • Players typically have income taxes withheld at the federal, state, city, and local levels. A player can deduct up to $10,000 of state and local taxes on their federal income tax return.
• Mortgage Interest
  • You can deduct the mortgage interest paid on your home – note that the interest is capped at a mortgage of $750,000.

Keep in mind that regulations are constantly changing, and it’s important to work with a CPA who can advise you on allowable tax write-offs for athletes.

What Is not Tax-deductible?

For additional clarification, see the below list pertaining to what is not a tax-deduction on professional athlete taxes.

Non-tax-deductible Expenses:

• Supplements & Dietary Costs
• Training & Gym Fees
• Chiropractic / Body Maintenance
• Clothing, Including Baseball-Specific Workout Clothing
• Temporary Living Costs
• Gifts
• MLB Player Dues
  • Typically deducted from wages by your organization – these are not deductible.
• Personal Expenses
  • These include vacations, furniture, watches, jewelry, etc.
• Tax return, brokerage account, and financial management fees:
  • Income tax preparation and consulting fees are deductible if used for a business tax return.
• Travel
  • This includes meetings with agents, scouts, trainers, and anyone directly related to your contract with an organization. Travel for endorsement or marketing income is deductible – explained further below.
• Agent Fees Related to Contract Negotiation
  • Commissions and/or fees paid to an agent that are directly related to your contract negotiation with an organization are not deductible. Fees paid to your agent for marketing and endorsement income is deductible.
• Vehicles
  • Only limited amounts of vehicle expenses are generally allowed as a deduction (unless the player has outside endorsement income).
• Cell phones
  • Cell phones may be partially deductible as a baseball expense but are seldom fully deductible.

The above lists of professional athlete tax deductions are not comprehensive. Please contact us if you have any questions about the deductibility of a particular item.

Tracking Your Expenses to Pay Less tax

It is crucial to have proper documentation to support the deduction of the items listed above. In other words, track your expenses – and provide all invoices and receipts to your accountant.

An accountant’s ability to prepare taxes for professional athletes is only as good as their records. If your records are a mess, then your return won't detail everything correctly. This can cost you a bundle as your accountant tries to recreate your financial documents for the last year.

Athletes’ salaries, investments, and business interests require robust tax planning. Our family office structure allows us to see the whole picture and provide unbiased, holistic wealth management for athletes.

Contact us today if you have any questions about tax write-offs and other ways to maximize your after-tax net worth as a professional athlete.

Article by Josh McAlister, CFP®, RMA®, CPA - Private Wealth Advisor at AWM Capital.

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