Taxes are complicated, even for typical income earners with limited investments. So, when it comes to filing taxes as a professional athlete, actor, traveling speaker, or anyone else who works in various states, the complexities are only compounded.
Being a high earner across multiple states, countries, and contracts creates a complex tax situation and a busy lifestyle that makes taxes easy to ignore. (How would you know EVERY location you work in wants their cut of your income tax in that location? I’ve surprised a few clients with that revelation.) Here are more unique considerations to keep in mind when it comes to filing taxes.
Your taxes, your responsibility
Just ask Brazilian race car driver Helio Castroneves. Remember him? Back in 2009, at the height of his racing career, Castroneves was charged with tax evasion and conspiracy. If convicted, he (and his business manager and motorsports attorney) would have faced over six years in prison. While these two “professionals” handled all aspects of the driver’s finances, the court still held Castroneves liable for the tax filing mistakes.
What went wrong? Castroneves’ manager and attorney invested millions of dollars of pre-tax sponsorship and licensing deal dollars into a foreign company. Prosecutors say the team did so to dodge taxes, while defenders say it was to set up a strong retirement plan. To make matters worse, Castroneves had also failed to report as income thousands of dollars in airline tickets, clothing, and other gifts.
This story serves as a stark reminder for high net worth individuals and others with complicated finances: you’ve got to surround yourself with a team of tax and financial experts who know how to handle your uniquely complex situation. Not just for your own legal protection, but to ensure the income you make throughout the ups and downs of your career is managed wisely.
An experienced financial professional can help you maximize your take-home pay and stay on the right side of the law
Beyond protecting you from legal consequences, working with a tax and finance professional who can handle the complexities of high-earning athletes and celebrities will save you money in the long run.
If you choose to work with a tax advisor at Cook Wealth, here are some tax-minimizing considerations your advisor may walk you through:
Your primary residence really matters. The bulk of your income tax will get paid to the state of your primary residence. That means living in a state with no income tax, like Texas or Florida, can save you a lot. On the other hand, living in luxurious California may be appealing, but with the highest income tax in the country, it’ll cost you.
If you earn in multiple states, tax withholding is not straightforward. The “jock tax” as it’s sometimes called can take a big bite out of a professional athlete’s income. While tax laws vary in every state, the basic concept is that visiting athletes must pay income taxes to the state they’re competing in. It keeps a portion of the income earned in the state, within that state. For athletes who withhold a flat rate of their income, the jock tax can leave them with a significant tax over or under payment based on the local rate in the states they visited. This is true even if their employer is withholding taxes on their behalf. (And you have to file a tax return in every state in which you work or compete!) You need a highly detailed, expert tax professional to help navigate this intricate policy.
Don’t miss those deductions! A highly trained tax professional can help you maximize your allowed deductions each year. There are a variety of deductions available to athletes, including agent’s fees, business expenses including workout clothes and gym memberships, and even athletic equipment and nutritional supplements. While it might not seem like much at first glance, over the year those expenses can really add up to big tax savings.
Retirement savings takes a bit of creativity. While saving into your 401(k) and IRA accounts does come with a tax benefit, for most athletes and traveling employees with significant income, the annual deposit cap on these accounts simply isn’t big enough. In that case, you must look for an alternative tax-efficient investing strategy. That’s where the benefit of working with a Cook Wealth tax and financial advisor really kicks in. With both tax professionals and wealth advisors on your team, you can rest easy knowing you’re prepared for April 15th and your golden years.
These are just a few examples of the careful considerations athletes, drivers, and high earning celebrities must account for.
As a tax filer, you are responsible for your taxes paid and unpaid. Even though you have an accountant, at the end of the day, your signature makes it your responsibility.
The more complex your financial situation, the more critical your team of experts. At Cook Wealth, we have experience working with high net worth individuals just like you, protecting them from filing mistakes and maximizing their take-home income.
Do you have a quick question about tax or financial planning? We’d love to help. Grab a 15-minute spot on our calendar or send us a message below.