By K. Sean Packard
The election between the two most unpopular candidates in US history is now, mercifully, over. Millions of people are ecstatic, although even more are disappointed based on the popular vote. Feelings aside, Donald Trump will begin his presidency with a Republican-controlled House and Senate eager to immediately cut taxes. President-elect Trump’s tax overhaul, if passed, will affect nearly every professional athlete’s wallet. Below are some highlights.
Tax Rates
All athletes will save taxes via a simplified three-tier tax bracket system, coupled with a drop in the highest bracket from the current 40.5% (including the Medicare Surtax, which will likely be gone under Trump’s plan) to 33%.
LeBron James was a vocal supporter or Hillary Clinton, but the Cleveland Cavaliers forward stands to potentially save more than $15 million a year under Donald Trump’s tax plan. (AP Photo/Jay LaPrete)
LeBron James, a vocal Clinton supporter, stands to save $2.3 million per year on his $31 million salary from the new three-year, $99.9 million contract he signed this summer with the Cleveland Cavaliers. James is only the third NBA player all-time to earn more $30 million in salary for a single season after Michael Jordanand Kobe Bryant.
Business Income
Under Trump’s plan, all business income would be taxed at a flat 15%. This includes Schedule C, LLC and S-Corp income. Pass-through and disregarded entity income is currently taxed as ordinary income to the players.
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Forbes estimates that James made $54 million a year in endorsements off the court between June 2015 and June 2016 as part of our annual look at the world’s highest-paid athletes (James ranked third overall at $77 million due to a lower salary from the Cavs during the time period). His tax savings on these deals will save him $13.8 million annually.
Additionally, this proposal would simplify tax planning for athletes. Many high-endorsement athletes utilize loan-out corporations whereby they pay themselves a salary from an S-Corp and take some profit distributions to avoid self-employment taxes. Under Trump’s plan, this use of loan-outs becomes obsolete, because nobody will pay himself a salary to be taxed at 33% when he can be taxed 15% through an LLC.
Itemized Deductions
Now for the bad news for James. Under Trump’s plan, personal exemptions are eliminated and itemized deductions are capped at $200,000 for married couples. High earners already do not deduct personal exemptions due to the phase out, so this will not affect most athletes. But the itemized deduction reduction will most certainly affect many of them.
Let us assume that LeBron has $5 million in itemized deductions each year (not at all unfeasible). Under current law he can deduct $2.463 million for a tax savings of $975,000. Under the Trump plan, he will only be able to deduct $200,000 for a tax savings of $66,000. This adjustment to the tax code will cost him $909,000.
All told, if President-Elect Trump’s tax proposal is passed by a friendly and motivated Congress, LeBron James stands to save $15.16 million annually in federal income taxes, without considering the tax savings on investment income.
For a more in-depth view of Trump’s tax plan:
This is a guest post from K. Sean Packard, CPA, who is Director of Tax at OFS. He specializes in tax planning and preparation of tax returns for pro athletes. He can be reached at sean.packard@ofswealth.comand on Twitter at @AthleteTax.
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