Fouled by the taxman

Boston Globe ^ | July 14, 2010 | Jeff Jacoby

[Second Amendment First]

A WEEK before LeBron James’s announcement on ESPN that he was leaving the Cleveland Cavaliers to join the Miami Heat, the New York Post and Rush Limbaugh saw it coming — and for reasons having nothing to do with sports.

“If LeBron James goes to the Miami Heat instead of the Knicks,’’ the Post noted gloomily on July 1, “blame our dysfunctional lawmakers in Albany, who have saddled top-earning New Yorkers with the highest state and city income taxes in the nation, soon to be 12.85 percent on top of the IRS bite. There is no state income tax in Florida.’’ Consequently, a five-year, $96 million contract (the estimated deal he could get in either city), would cost James $12.34 million in New York taxes, according to the Post, but nothing in Miami (though he may be taxed when he plays in other cities). “Quite a penalty for the privilege of working in Midtown.’’

Limbaugh, an ex-New Yorker, amplified the point: “Here you have these poor schlubs that . . . own the Knicks and they’re going to try to persuade LeBron James to move to New York to play for the Knicks and they gotta tell him, ‘By the way, you’re going to pay about 12 to 15, maybe $20 million more in taxes in New York than you would [in Florida].’ ’’ Limbaugh drolly asked his audience whether James should take the Knicks’ offer “and pay the additional taxes to show his ‘compassion,’ ’’ or sign with Miami and “use the additional money for his own economic stimulus.’’

[Alberta's Child]

Consequently, a five-year, $96 million contract (the estimated deal he could get in either city), would cost James $12.34 million in New York taxes, according to the Post, but nothing in Miami (though he may be taxed when he plays in other cities). "Quite a penalty for the privilege of working in Midtown."

The danger in giving an exact estimate like this is that it doesn't account for the complexities of a huge contract of this kind, and the legitimate mechanisms that can be used to avoid paying taxes on the total value of the contract. I can pretty much assure you that a player who signs a five-year, $100 million contract with the New York Knicks does not get $20 million worth of paychecks every year, does not report $20 million on his W-2 form every year, and would never pay $12+ million in New York State taxes over the life of the contract.

[silverleaf]

You can also pretty much assure us that whatever he pays for the privilege of living in NY will exceed his cost of living in Miami.

And then, there’s the weather....

[Daisyjane69]

Let me be the first to inform Free Republic that LeBron James’ change of address was not some sort of tax move. He did not even know of it until Pat Riley’s people informed him of it. This has been documented.

There is no reason LBJ would know such a thing. He was and is surrounded by 25 year old “homies.” There is no grownup in the room with this bunch. Early on, LBJ fired his “agent” choosing to be represented by his posse. These are his Akron homies, most of whom are SVSM hanger ons.

The fact that he/they chose South Beach is....intriguing. Samantha has the two babies, these homies have the beach, the bars, and the babes. And his advisors are his homies.

Something tells me this won’t end well.

[101voodoo]

Also necessary to consider is the endorsement contracts he would land in NY.

[Alberta's Child]

Good points, but I don’t think cost of living really comes into these discussions, since the salaries are so lucrative that the cost differential may not matter. And since Lebron James is from Ohio, weather may not be a concern, either. I’m from the Northeast and winters can get tiresome, but I couldn’t imagine living in a place like Florida, Arizona, or Southern California where there is no winter at all.

[Alberta's Child]

Right -- and there's an intriguing tax angle to that, too.

Derek Jeter plays for the Yankees and has lucrative endorsement contracts (Nike, Ford, etc.). But he has established Florida as his official residence, which likely allows him to do two things:

1. Itemize the cost of his living arrangements in New York during the baseball season as a tax-deductible business expense.

2. Avoid paying New York State income taxes on his endorsement income, since that income isn't directly derived from his employment with the New York Yankees.

P.S. I think this is one reason why the New York Yankees organization is managed from a Tampa, FL headquarters (highly unusual -- if not completely unique -- among professional sports teams). This enables their management players to take steps to reduce their New York State income tax burden.

[T-Bird45]

Something tells me this won’t end well.

I think you have a very well-tuned crystal ball. Good post!