How do pro athletes, at those with multi-million contracts, reduce their tax liabilities?
I know that some of them take deferred compensation which makes sense as they won’t be earning those salaries when they’re in their 40s and 50s.
The average NFL player lasts for a little over three years, and a starting rookie may make as little as $435K in his first year. For these guys, deferred compensation can help reduce their tax liability.
But deferred compensation won’t do much for the likes of Tom Brady or Patrick Mahomes. If you’re married and filing jointly, any income beyond $628,301 is taxed at 37%. Brady reportedly earned about $12M per year…for many years. Unless he’s deferring some of that salary until he’s about 257 years old, I don’t think he’d ever get his annual income below $628K to enjoy any reduced tax liability.
For those average players, life after football is tough:
The statistics are well-known and oft-stated: The average NFL career lasts 3.3 years, according to the NFL Players’ Association; 78 percent of players go broke within three years of retirement and 15.7 percent file for bankruptcy within 12 years of leaving the league, according to a paper published by the National Bureau of Economic Research.
According to a 2009 Sports Illustrated article, 60 percent of former NBA players are broke within five years of retirement. By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress. Sucked into bad investments, stalked by freeloaders, saddled with medical problems, and naturally prone to showing off, many pro athletes get shocked by harsh economic realities after years of living the high life.
IIRC the NHL Players Assoc has a whole group dedicated to financial advice for players. A lot of pro sport athletes go from penniless college or farm team juniors to someone who makes more in a month than most people make in a year. Few of them know how to handle this sort of wealth, let alone plan for an uncertain future where they could be one broken bone away from no more paycheques.
For the lucky few, I imagine there are financial advisors who can tell them about good investments to hide that income by re-investing in schemes where the costs are deductible from income. If you have $5M income that year, but can get by on $1M, why pay taxes on the other $4M to put it in the bank. Buy some investment where the cost of buying that is deductible, then as you withdraw your money from the investments in the future, you only pay taxes on what you need.
I assume simply buying shares on the stock market can do this?
Athletes also often aren’t trained or otherwise prepared to take up any other job. They often have trivial majors in college, and even in those trivial classes, the school often puts pressure on the teachers to pass them regardless of their actual performance. Some of them, of course, do take advantage of their college scholarships to get a quality education in the field of their choice, but it’s all too easy to avoid that.
The problems of star sportspeople are probably universal.
A FifPro (he Fédération Internationale des Associations de Footballeurs Professionnels) study found that 34% of former players over 40 have osteoarthritis.
Other research suggested that two-fifths of footballers were bankrupt within five years and a third had divorced inside a year. “There can be a loss of material resources but perhaps hardest are the symbolic resources,” says Dr David Lavallee from Abertay University. “The stronger and more exclusive the identification with the role of footballer, the greater risk of retirement-related problems.”
One of the bits I remember from that 30-For-30 film was the pro basketballers who were trying to be friends with their old buddies form the 'hood. Suddenly they are a guy with a bottomless wallet surrounded by guys who have no money - and nothing brings out a person’s personality that being attached to someone with a huge wad of cash. It wasn’t just “let’s go drinking in the most expensive nightclub and Jamal will pay!” it was things like “why don’t you buy us all our own ride?” and stuff like that.
Plus, they did not realize that buying mama a nice new house, they were actually signing up for 15 to 25 years of some serious payments. These guys had never bought anything bigger than a fancy pair of sneakers, and suddenly had to deal with a windfall and learn to say “no” to their alleged friends. As one guy said - his friends all knew when payday was, and were sitting outside the office when he came out looking for a handout. There’s a reason why rich people typically hang out with other rich people - they can be sure those are not hanging around just for the free lunch.