One of the most exciting parts of a sport’s season is when free agency begins and several big name players change teams. One phrase you may often hear when referring to star players during NBA free agency is, “If they play for this team, they will make more money.” The reason for this is because the NBA has a maximum salary that players can earn. So no matter how great a player is, there is a cap on the salary a player can receive.
The specific details of a maximum can vary player to player, but in general a player who has completed fewer than seven seasons can earn up to 25% of the salary cap. As seasons played increase, so does the percent of the salary cap that a player can earn. A player completing more than seven, but less than ten seasons, can earn up to 30%, and a player completing ten or more seasons can earn up to 35% of the salary cap. The salary cap varies year to year, so the percentage is based on the salary cap in effect the first year of the contract. Specific contract details can be found in the NBA’s 2011 Collective Bargaining Agreement found on the NBA’s website.
So if the NBA has a maximum to their contracts, how can a player make more money playing for one team over another? The answer lies in the state and local income taxes in effect in the city the player calls home. Let’s take LeBron James for example. This year LeBron rescinded his talents from South Beach and returned them to Cleveland. LeBron agreed to a two-year, $42.2 million deal, receiving $20,644,400 in year one. The 2014-15 season will be LeBron’s eleventh season in the NBA. Therefore, he is eligible to earn up to 35% of the salary cap. The salary cap used to calculate maximum salaries is based on a percentage of the NBA’s Basketball Related Income, and is $58,984,000 for the 2014-15 season. $58,984,000 x 35% = $20,644,400. LeBron, therefore, is receiving the maximum contract.
Though LeBron had many reasons to come back to Cleveland, money was not one of them. If LeBron had re-signed with the Miami Heat, he would be playing in a state with no state or local income taxes. By coming to Cleveland, LeBron will be subject to both Ohio and Cleveland income taxes. For Ohio, LeBron will be in the highest tax bracket and pay a total of $1,219,282. Luckily, LeBron did some good tax planning when choosing where to build his home as he does not live within any city or school taxing districts. However, athletes are required to pay local taxes in the city games are played in. Therefore, LeBron will be subject to Cleveland’s 2% income tax for home games while he would have had no city income tax in Miami. The additional Cleveland income tax comes to $206,444. In total, LeBron will be taking home $1,425,726 less than if he had stayed in Miami in the first year of his contract alone.
So when choosing your next job or moving to a new home be sure to consider the tax implications. Though most of us won’t be losing in excess of $1.4 million, a significant portion of your take-home pay can be lost by choosing a new home within local taxing districts with high rates. Fortunately for LeBron, he does not need to worry about money and the $1.4 million is a small price to pay to come home.
By: Mark Sawyer, CPA