We see the free-agent numbers, and we’re almost always astonished.
Chris Bosh: Five years, $118 million.
Carmelo Anthony: Five years, almost $129 million.
LeBron James: Two years, $42.1 million.
What many people forget to realize, however, is that most players won’t receive anywhere close to the amount of money in their contracts. In fact, most are lucky if they wind up with about half. Why?
Two words: income tax.
It makes a huge difference.
What many people also fail to realize, though, is that states like Texas and Florida have no income tax, while states like New York and California do – and not only do have them, but they’re also high. So James leaving Florida and returning to Ohio will cost him a lot of money.
Or will it?
“When he went to South Beach – or college for four years, as he called it – I initially thought he went there to accomplish two things,” sports tax CPA Robert Riaola said on The MoJo Show. “One was to win a couple of rings. Mission accomplished. And the other, we thought, was to avoid the income tax in Ohio and go play in a tax-free state, Florida. However, about a year ago, he (posted a photo on) Instagram of him serving jury duty in Ohio. Where I grew up, you only serve jury duty in a state (in which you’re a resident). So as strange as this may sound, him going back to Ohio – assuming he was an Ohio resident all along – doesn’t really cost him any more money in tax because he would’ve been paying the Ohio taxes no matter who he played for.”
Still, James’ contract left Riaola scratching his head. Cynics will argue that James only signed a two-year deal with Cleveland in case he has another change of heart and wants to take his talents elsewhere. In reality, max contracts are expected to increase in a few years due to the new TV deals, and James simply wants to make as much money as possible.
For Riaola, this is an issue.
“Why should LeBron James have to take the risk of taking a two-year deal for $42 million?” he asked. “He’s not going to go anywhere. He won’t opt out. Why not put a rule in the CBA that says, look, if the salary cap and TV deals go up when the players sign max contracts, (they should be able to) get the increase – instead of having to take a short-term deal. It seems a little ludicrous that Bosh gets $118 (million) for five (years), and (James is) taking $42 (million) for two (years). Now, (he’s probably going to get the max contract in two years), but guys do get hurt. So I don’t think taxes was really a factor for him.”
As for Anthony, Riaola said the financial difference between the offers from the Knicks and Lakers – after taxes – would have been about $17 million, so it’s possible that played a role in Anthony’s decision to stay in New York.
But the most intriguing free-agent, income-tax example in recent memory might be Dwight Howard in 2013.
“Dwight turned down a five-year, $118 million deal from the Lakers, which would have netted him $59 million, (for) a four-year $87 million deal (with the Rockets), which netted him $50 million,” Riaola said. “Even though it was a large difference – almost $30 million in gross salary – the difference (after) state taxes was only $9 million.”