With my recent law school graduation, this summer has been spent studying for the New York Bar Exam. This has unfortunately led to a decrease in the frequency of posts on TaxaBall. However, LeBron James and Co. have conveniently made a previous post relevant again allowing me to recycle an old post with a new set of facts.
Monday morning, LeBron James' wife, Savannah James, posted this photo to her Instagram that led many to wonder if LeBron would "take his talents" back to the Cleveland Cavaliers in this summer's free agency decision. While all the commotion focused on LeBron's next home on the court, Mrs. James' post brought back into TaxaBall's focus the James' home off the court.
Like all US taxpayers, professional athletes pay state income taxes to their resident state on all their income earned. Additionally, taxpayers pay state income tax on the portion of income they respectively earn in nonresident states. For professional athletes, this is the proportion of income they earn when playing road games in various states. Since professional athletes are unique for the large number of states in which they "earn income", the taxation of the income earned on these road games is commonly called the "Jock Tax".
Like all US taxpayers, professional athletes pay state income taxes to their resident state on all their income earned. Additionally, taxpayers pay state income tax on the portion of income they respectively earn in nonresident states. For professional athletes, this is the proportion of income they earn when playing road games in various states. Since professional athletes are unique for the large number of states in which they "earn income", the taxation of the income earned on these road games is commonly called the "Jock Tax".
When LeBron first joined the Miami Heat many were quick to reason he chose the Heat to save on state income taxes. Florida does not have a state income tax so as a Florida resident LeBron would only pay the "jock tax" on the income he earned when playing on the road. In contrast, Ohio has a top state income tax rate of 5.39%, and Akron (LeBron's city of residence) has a flat city income tax of 2.25%.
As I detailed in the first version of this story, and as Mrs. James reiterated today, the James family remains residents of Akron, Ohio. Applying the Akron and Ohio tax rates to Lebron's $53 million in endorsements, and 2014/15 salary of $20 million, the James' decision to remain residents of Akron will cost LeBron $5.57 million ANNUALLY!
In perspective, LeBron wastes more money on state and local income taxes than 79% of the NBA made this past season! Many compliment LeBron for his decision making on the court but LeBron may want to evaluate his decision making off the court.
As I detailed in the first version of this story, and as Mrs. James reiterated today, the James family remains residents of Akron, Ohio. Applying the Akron and Ohio tax rates to Lebron's $53 million in endorsements, and 2014/15 salary of $20 million, the James' decision to remain residents of Akron will cost LeBron $5.57 million ANNUALLY!
In perspective, LeBron wastes more money on state and local income taxes than 79% of the NBA made this past season! Many compliment LeBron for his decision making on the court but LeBron may want to evaluate his decision making off the court.
UPDATE: Since creating this post a few individuals with more inside knowledge than I possess have informed me that LeBron is a Florida resident for state tax purposes. I am willing to admit I am wrong if their information is correct. However, I do think even if those sources are correct, LeBron is playing with fire when it comes to avoiding Ohio tax residency and subsequently Ohio state income tax.
Ohio does have a very generous residency standard when compared to other states so it could be easy for LeBron to dispute his residency in Ohio - if Ohio were to claim he was a resident of their state. However, in my opinion (and again, I am not yet a CPA nor a lawyer) the fact that LeBron was eligible for the Ohio jury duty he served last year makes him an easy target for Ohio state income taxes. Jurors are selected in Ohio from a list of "registered voters or licensed drivers residing in the county or city that the court serves". With state budgets across the country struggling for revenue and Ohio potentially facing a budget deficit as early as next year, states have become more willing to challenge taxpayers for additional revenue streams.
The risk of Ohio succeeding on claiming LeBron as a resident and collecting $6M in taxes owed this year plus back taxes on LeBron's salary for up to the past seven years, is not worth the benefit of having a place to stay when visiting Ohio for a few weeks in the off-season, nor the benefit to vote or have a drivers license from Ohio.
LeBron would be wise to create an irrefutable presumption of his residency in Florida as soon as possible. If he continues to desire to own a location in Ohio, there are many business planning options available where an entity other than the highest profile athlete in the world can own a place he can stay for a few weeks in the year.
It wouldn't be the first time a state has tried to get income from a professional athlete claiming to be a Florida resident.
Ohio does have a very generous residency standard when compared to other states so it could be easy for LeBron to dispute his residency in Ohio - if Ohio were to claim he was a resident of their state. However, in my opinion (and again, I am not yet a CPA nor a lawyer) the fact that LeBron was eligible for the Ohio jury duty he served last year makes him an easy target for Ohio state income taxes. Jurors are selected in Ohio from a list of "registered voters or licensed drivers residing in the county or city that the court serves". With state budgets across the country struggling for revenue and Ohio potentially facing a budget deficit as early as next year, states have become more willing to challenge taxpayers for additional revenue streams.
The risk of Ohio succeeding on claiming LeBron as a resident and collecting $6M in taxes owed this year plus back taxes on LeBron's salary for up to the past seven years, is not worth the benefit of having a place to stay when visiting Ohio for a few weeks in the off-season, nor the benefit to vote or have a drivers license from Ohio.
LeBron would be wise to create an irrefutable presumption of his residency in Florida as soon as possible. If he continues to desire to own a location in Ohio, there are many business planning options available where an entity other than the highest profile athlete in the world can own a place he can stay for a few weeks in the year.
It wouldn't be the first time a state has tried to get income from a professional athlete claiming to be a Florida resident.
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