By | Jonathan Nehring | Disclaimer

Last night, athletes across the globe took center stage in ESPN's award show, The ESPY's. Similar to any other awards shows, various guests received gift bags at the event. The ESPY's gift bag has become such a staple to the show that it has its own webpage detailing all the contents inside.

Not to be outdone by the kind hearted folks at ESPN, the IRS will also be so kind as to give a gift to all of these gift bag recipients – a large tax bill. According to the IRS, a gift bag is considered taxable income. The dollar amount that is taxable is the fair market value of all the contents of the bag. In respect to the ESPY's gift bag, the fair market value is estimated between $25,000 - $30,000. This means that professional athletes making over $400,000 are members of the elite 39.6% marginal tax bracket club and will owe the IRS around $11,800 for the gift bag alone. In addition, the ESPY's were held in Los Angeles, CA, home of a marginal tax bracket of 13.3% for any income over $1,000,000. Therefore, any millionaire athlete will also receive a California tax bill for the income they “earned” via the ESPY's gift bag for approximately $4,000. 

Still want that gift? 

Check out the list of items inside the gift bag here and see if it’s still worth taking. If it isn’t, there are some options.

1. You can donate the gift to charity. The IRS will give you a tax deduction if you donate the gift bag to a qualified charitable organization. 
   
2. You can decide to not redeem many of the vouchers and gift certificates inside the bag. According to the IRS, a person accepting AND redeeming a gift certificate or voucher has “earned” taxable income. Therefore, if you don’t redeem that gift certificate, it could be argued that you never earned that income. If you look again at the list of gifts given in the ESPY's gift bag, many of them are in the form of a gift certificate or voucher. I would suspect this isn’t by accident.

For all the massages, flights, and hotels provided by teams, would you take a free wooden bowtie, scalp shaver, Keurig, and sailing lessons for a $15,000 tax bill? Comment below!

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By Jonathan Nehring | Disclaimer

July 4th may be the day the entire country celebrates it's independence but in the NBA Independence Day begins a few days earlier. July 1st is the date that NBA agents are set free and can begin negotiating contracts with potential employers. Team's can't officially sign these players until the July moratorium ends on July 11th but terms and agreements in principal are allowed.

One of the biggest free agents to hit the market this summer will be former LA Laker - Dwight Howard. Five teams seem to be in the running for Dwight Howard and Dwight has stated he will announce his decision shortly after July 11th. Of the five teams vying for Howard to "take his talents to" - the Houston Rockets met with him Sunday night, Golden State and Atlanta are set to meet with him Monday, and the Dallas Mavericks and LA Lakers on Tuesday. 

Regarding the logistics of the amount of money these teams will be offering Dwight, all of them will be offering him a max contract but the Collective Bargaining Agreement (CBA) of the NBA allows the Lakers (his most recent team) to offer him a longer and larger contract. The Rockets, Golden State, Atlanta, and Dallas can "only" offer Dwight a 4 year contract for $87,500,000 ($21,875,000 / yr) while the Lakers can offer a 5 year contract for $118,000,000 ($23,600,000 / yr). 

Before he says what his nightmares are, he may want to ask LeBron James what summers as a high profile NBA unrestricted free agent can be like. For all intents and purposes it is a certainty that Howard will be signing a max contract this summer. What team he signs with is anything but certain. However, there are two teams that do seem to be in the forefront for Dwight to “take his talents” to next NBA season – his current Los Angeles Lakers and the Houston Rockets.

The NBA’s Collective Bargaining Agreement is designed to allow teams for whom a player currently plays to be able to offer that athlete a better contract than any other team in the league. This means the maximum contract the LA Lakers will be able to offer Howard is a 5 year contract for $118,000,000 but the maximum any other team, such as the Houston Rockets, can offer is a 4 year contract for $87,500,000. Simply put, the Lakers can pay Howard $23,600,000 per year when the Houston Rockets can only offer to pay him $21,875,000 a year. Extending that to four years, the Lakers can pay Howard $6,900,000 more than the Rockets could. So it’s a no brainer, Superman is going to stay with the Lakers.

Not so fast, Jimmy Olsen.

The state of Texas does not have a state income tax whereas California’s 13.3% state income tax rate is the highest state income tax rate in the United States. 

Regardless of where Howard plays, he will have to pay his federal income taxes so there is no difference between the two teams there. Because there is such a high tax rate in California it is likely that Howard will not live in the state of California. Living there would mean he would have to pay California state income taxes on his entire salary as well as all of the endorsement offers he receives. Since Howard doesn’t live in the state, he is subject to California taxes under what is more commonly known as the “jock tax”. 

The tax reasoning behind this is that you are supposed to pay taxes in the state that you earn them. Under this reasoning, athletes pay state income taxes on each state they travel to because those states consider the athletes to have earned that part of their yearly salary in that state. States calculate how much an athlete owes their state by determining how many “duty days” an athlete spends in their state. Duty days are jargon that simply mean how many days were you visiting a particular state. The individual states don’t just charge the athletes for game days because a player may practice in that state for a day prior to the game so why not charge them for 2 days instead of one. Counting preseason, the NBA season is approximately 183 duty days. Since Howard will be playing 41 away games he will not be spending all 183 of those days in California and thus not paying California income taxes on the days he is earning his salary in another state.  

Simply, Dwight will pay income taxes to California for 64% of the salary he makes in a year. Applying 64% of Dwight Howard’s$23.6M salary to California’s 13.3% state income tax rate shows that he would pay approximately $1,848, 873 in just California state income taxes each year! 

With nearly $2M in salary reduced from Howard’s annual salary from California income taxes and $0 from Texas income taxes, the net annual income Dwight can receive would be $12,447,763 from the LA Lakers and $13,254,736 from the Houston Rockets. So now instead of the Lakers having the $1.7M upper hand by being Howard’s current team, the Houston Rockets have an $806,973 upper hand on final net income that he would receive.

 Is $800,000 a year enough to make Howard go to Houston? 

We will see. 

LeBron went from Ohio (5.92% State Income Tax) to Miami (0% State Income Tax). Was it all over state income taxes? Probably not. 

Explaining the savings of $800,000 to someone who makes $23,600,000 is like asking someone making the median US income to make their next job decision based off $1,726 in annual tax savings.  It’s possible, but not likely.