Dwight Howard and the Jock Tax Dwight Howard was one of the top - TopicsExpress

Dwight Howard and the Jock Tax Dwight Howard was one of the top NBA free agents this offseason. His negotiations and eventual decision to sign with the Houston Rockets serves as a perfect illustration of how state and local taxes can have a huge impact on an athlete’s bottom line. Howard, who played for the Los Angeles Lakers last season, was offered a five-year, $118 million contract to remain in California. He was also offered a four-year, $87.6 million deal from the Houston Rockets. The Lakers offer guaranteed Howard a whole extra year at $23.6 million and boasted a higher overall gross value. However, the difference between the two deals shrinks as a result of the ‘jock tax’, which is the principle that athletes are liable for tax every time they play in a different jurisdiction. There is no state income tax in Texas, where the Rockets play, while California’s highest marginal tax rate of 13.3% is the highest in the country. Rockets players are still liable for tax when they play road games, but the difference in state and local taxes between California and Texas is a major one. Based on an analysis of the NBA schedule and the applicable tax rates, Howard figures to pay anywhere from $2.9 to $3.2 million per season in state and local taxes as a member of the Lakers. Repeat that exercise with the Rockets and the state and local taxes barely clear $500K per season. Factor in federal taxes on the differences in salary and the disconnect between the deals amounts to approximately $10 million, not the $30.4 million difference in the respective gross values. For Howard, who will now make $21.9 million per year, the difference of $2.5 million per season clearly wasn’t persuasive enough to keep him in Los Angeles. While some contracts may appear to be worth more than others, taxes play a major role in shaping athlete’s decisions. Contact Wouch, Maloney & Co with any questions regarding multi-state tax issues and athlete and entertainer taxation.

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