Sunday, April 15, 2007

And you thought your taxes were complicated. . . .

I spent the better part o this Sunday participating in the mid-April classic: tax time. Watching the Twins’ game through my stack of W-2s, 1040s, and M1PRs I wondered if the real reason Joe Mauer was out of the line-up was because he was desperately trying to get his return in on time. This made me wonder- how do baseball players pay state taxes if they spend some much time playing in other states?

As it turns out, baseball players state taxes are exceedingly complicated. Because players earn income based on each game they are scheduled to play, both home and away teams are taxed in the state that the game is played in. This means each player has to file taxes in each state they play in!

In Minnesota, the taxation system follows a tax credit scheme that was brought forth in the early 90s. Under this system, both home and visiting teams have to pay taxes to the state of Minnesota. The taxation of the visiting athletes began relatively recently in California in the early 90s and is now policy in 14 of the 17 states that have MLB teams. This is often referred to as the “jock tax,” this name is a bit of a misnomer because the tax system applies to all workers earning income while performing services in other states. It is generally only enforced in high income and high profile cases such as athletes and entertainers –hence the nickname. Historically, Minnesota has particularly benefited from this so-called “jock tax” because the Twins payroll has been considerably lower than the league averages, meaning home games bring in more money then away games pay out.

Further complicating this tax system is the way in which it is implemented. All of the Twins are taxed in Minnesota (7.85%, the highest rate due to their large salaries) for each game they play both home and away. However, when they are playing an away game they are also taxed by the sate in which they are playing (if that state has an income tax). To account for this, Minnesota gives the Twins players a credit for the taxes they pay in other states. Since Minnesota has the second highest income tax of all states with baseball teams, the only time the Twins players end up with an actual credit is when they play in California (tax rate 9.3%). Visiting players are taxed here by Minnesota's rate and are, in turn, credited by their own states.

With all of these complications, I’m fairly certain that TurboTax doesn’t make a professional athlete edition. Fortunately, with an average salary over three million a year, baseball players can afford to hire an accountant. Despite my comparatively minuscule salary, learning about baseball players’ tax time woes makes me appreciate the relative simplicity of my own.

I am not an accountant and I know little to nothing about taxes other than what my tax software tells me- information for this post was gleamed from:

Aiuppa, Haupert and Sheroney, NINE journal, vol. 12. 1. 2003

Hoffman and Hodge, Tax Foundation Special Report, 130, 2004

USA Today Baseball Salaries list-

No comments: