Allan Rolnick, CPA
If you’re a football fan, you’ve just come off a weekend-long binge full of college and NFL games. If you’re a basketball fan, March Madness is just around the corner. If you’re a hockey fan…well, does anyone but another hockey diehard know what’s going on in your head right now? So you might not be thinking much about baseball. But L.A. Dodgers fans are excited to host their season opener against St. Louis on March 28. That’s because, just last month, they lured two-way star Shohei Ohtani away from their crosstown rivals, the Angels. Ohtani is one of the hottest players in baseball. So how did the Boys in Blue lure him north from Anaheim? They did it the Los Angeles way – with money. Lots and lots of money. Specifically, they signed him to a 10-year, $700 million contract making him the highest-paid athlete in the history of pro sports. But the real value isn’t just the number. Ohtani’s record-breaking contract includes a unique twist designed to “help” the Dodgers spend more to build a competitive team around him. And it offers him yet another bonus – it could help him save nearly $100 million in tax. Baseball lets teams pay their players up to $237 million per year on total salaries. Pay anything more and they owe the league a “luxury tax” on amounts above that cap. Ohtani and his agent didn’t want to swallow the team’s entire allowance. So they structured his deal to earn just $2 million per year while he’s playing. When that period ends, he’ll get $68 million more for each of the next 10 years. So, here’s how the tax angle works. As long as Ohtani plays in the United States, he’s subject to 37% federal income tax.
However, as long as he plays in L.A., he’s also subject to California’s highest-in-the-nation state income tax. That tax just went up this week to %14.4 on wage income over 1$ million per year. When he reaches that point in the contract – at age 40 – he can retire outside the state and avoid that bite. Assuming the rate hasn’t gone down, that puts nearly 98$ million more in Ohtani’s pocket. “But wait?” you might be asking yourself. “Won’t California just tax him anyway since he still earned that income playing in the state?” Fortunately for Ohtani, Washington passed legislation almost 30 years ago forbidding states from clawing back tax on former residents’ retirement income so long as it’s paid in “substantially equal installments” over 10 years or more. Of course, that means “Shotime” won’t be able to start spending those installments until 2034. But don’t feel too bad for him. He’s expecting to earn another 50$ million in endorsements next year, including his own line of branded shoes and apparel through New Balance. Like many athletes, Ohtani’s finances haven’t all been roses. In November of 2021, he took an equity stake in cryptocurrency exchange FTX to become a “global ambassador.” A year later, FTX declared bankruptcy, costing investors and customers billions. Ohtani is currently a defendant in a class-action lawsuit against him, along with Tom Brady, Steph Curry, and Naomi Osaka. At least he’s not chilling with FTX founder Sam Bankman-Fried in the same Brooklyn jail where Jeffrey Epstein didn’t kill himself. And so, baseball fans, what have we learned today? It’s not just how much you make that counts – it’s how you make it, when you make it, and sometimes even where you make it. That’s the sort of planning we love to do. So call us before you step into the batter’s box and let us help you hit a financial grand slam in 2024!
Allan J Rolnick is a CPA who has been in practice for over 30 years in Queens, NY. He welcomes your comments and can be reached at 718-896-8715 or at email@example.com.