State Income Taxes Play a Role in Free Agency

According to Law360, The free agent signing periods in the NBA this month saw players inking huge contracts, but while team names and deal numbers dominated the headlines, experts say the tax implications of those moves often play an unheralded but critical role in determining where the leagues’ stars call home.

In one of the biggest free-agent signings of the NBA’s offseason free agency, star forward Kevin Durant chose to leave the Oklahoma City Thunder, the franchise that drafted him out of the University of Texas in 2007, to join the Golden State Warriors, a team fresh off breaking the NBA record for most wins in a season.

The blockbuster two-year deal reportedly worth $54 million instantly makes the Warriors again one of the favorites to win the championship next season, putting Durant in a great position to win his first title, but the move also means Durant goes to California, which has the highest state income tax rate in the nation.

The move made sense to him despite going from a team in Oklahoma with a tax rate of up to 5.25 percent to a team in California where the tax rate for the highest income bracket reaches 13.3 percent, the highest in the nation. He also may be able to minimize his tax burden by delaying establishing residency in California, experts said, particularly over the course of his two-year deal. Residency is a subjective determination with factors that vary state to state, and with the limited NBA schedule and a long off season, he may be able to keep permanent residency in another state or at least delay California residency to net a larger portion of the overall contract.

Still, teams in states with no income tax like Florida, Texas, Washington and now potentially Nevada, as the NHL is putting a team in Las Vegas, know that this can make a difference, and they use it to their advantage, according to Sean Packard, a certified public accountant with Octagon Financial Services who specializes in tax planning and preparation for professional athletes.

While many factors go into an athlete’s decision to sign with a team as a free agent, one of the factors athletes generally take into consideration is the tax implications, as various tax rates of states could significantly affect the value of their deal.