The clock is ticking down on "summer." July 4th barbecues are a distant memory, and Labor Day is looming near. Forget about baseball's pennant races starting to heat up. Forget about the upcoming NFL season. It's time to talk basketball!
Taiwanese-American point guard Jeremy Lin played college ball at Harvard, where he notched an Ivy League-record 1,483 points, 487 rebounds, 406 assists, and 225 steals. That might have been enough to get drafted if "Ivy League" earned any respect with NBA scouts. Instead, he walked on to the Dallas Mavericks and warmed various benches for the Golden State Warriors, Houston Rockets, and (Chinese Basketball Association) Dongguan Leopards before catching fire with the New York Knicks. He averaged 18.5 points and 7.6 assists over 26 games before leaving because of a torn meniscus. But those 26 games were enough to ignite "Linsanity," with New York bars and restaurants introducing "Lintinis," asian-spiced chicken "Lings," and asian-inspired "lin-burgers" for beleaguered Knicks fans who finally had a reason to cheer.
At the end of the season, Lin became a restricted free agent. This meant he could sign an offer with another team -- but the Knicks could match it and keep him. Last month, the Houston Rockets re-signed him to a three-year, $25.1 million deal, which New York declined to match, and now, Linsanity moves south to Houston. So naturally, we want to know what it means for Lin's tax bill!
Let's start with Lin's rooting section at the IRS. Regardless of where he plays, he'll pay federal income tax at the top marginal rate of 35%. He'll also pay Medicare tax of 2.9%. If the Bush tax cuts expire at the end of the year, as they're already scheduled to do, that top rate will rise to 39.6%. And the Medicare tax jumps to 3.8% on January 1 as tax hikes included in the Affordable Care Act take effect.
Now let's look at his old tax bill for the Knicks. In "New York, New York", Frank Sinatra sings "If I can make it there, I'll make it anywhere." What ol' Blue Eyes probably meant is that if he could afford the taxes there, he can afford them anywhere. So, Lin starts out owing Uncle Sam anywhere from 37.9 to 43.4%. New York State shakes him down for 8.82%. Then New York City runs up the score for another 3.876% more. If Lin counted baskets like he paid taxes, he would have scored 481 points for the Knicks -- but kept just 239 after taxes!
Now let's look at his new tax bill for the Rockets. Lin will be glad that basketball is an indoor sport when he gets a taste of Houston humidity. But he'll find the tax climate a lot cooler. He'll pay the same amount to Uncle Sam, of course. But neither Texas nor Houston impose any tax on his income at all. None! So this difference could mean as much as a million dollars more per year in Lin's oversized pockets. Smart planning for a guy who graduated with an economics degree and a 3.1 GPA!
Of course, as is usually the case with taxes, things aren't quite so simple. Professional athletes pay state and local taxes wherever they play. That means that when Lin travels back to Gotham to play the Knicks, he'll renew his friendship with New York tax collectors -- but when he plays the Orlando Magic or Miami Heat, he'll enjoy the same zero percent tax rate in Florida that he gets in Texas. And of course he can deduct state and local taxes he pays from his federal taxable income.
Are you expecting an outstanding season in 2012? Maybe wondering where it makes the most sense to play ball? We're here to prevent the IRS from "calling a technical" on your finances. And remember, we're here for your teammates, too!
K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.
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