July 10, 2018

LeBron James Should Have Come to Houston

By joining the enormously talented Rockets, LeBron James could have seen a string of NBA championships. But, there’s another major reason that captivates the financial minds here at MTA. After taxes, he’d also have more money!

In case you missed it – LeBron James will now be playing for the Los Angeles Lakers starting with the 2018-2019 NBA basketball season.  It will be interesting to see how successful he will be in obtaining more NBA championships in L.A., but we’re more interested in how being employed in California will affect his tax return at the state and federal level?

LeBron recently posted on social media, “Northeast Ohio… will always be home.”  Considering California has one of the highest income tax rates in the nation, it’s no wonder he’s claiming Ohio as his permanent home (domicile).

State Income and Jock Taxes

If the state of California substantiates LeBron has statutory residency there, he may be subject to the top income tax rate of 13.3% (for 2018) on all his income, regardless of where it was earned.  Fortunately for Chris Paul, he signed with the Houston Rockets, where there is no state income tax.

As professional athletes, LeBron James, Chris Paul, and all other players have the burden of the “jock tax” – a state and local income tax imposed on nonresident athletes. Twenty-two states have NBA teams and nineteen of those states have an individual income tax.

Athletes paid to travel and play out-of-state are subject to the jock tax in just about every state (Florida, Texas, Washington state, and Washington D.C. excluded).  Certain types of bonus payments would be subject to the tax, as well.

Federal Taxes

At the federal level, tax reform has significantly affected athletes and entertainers, as well.  Since many perform in multiple states, they are subject to state income tax regardless of whether they are a resident or not.  Unfortunately, the state income tax deduction (reported on Schedule A of one’s Form 1040) has been limited to only $10,000 per year.  LeBron will now be earning a lot more income in the state of California this year, increasing his income tax liability substantially.

Even though he’ll be paying more state income taxes, under federal tax reform LeBron will only be allowed a much smaller deduction of $10,000 for all state, local, and property taxes. Chris Paul will also be limited to the $10,000 deduction, but since most of his games are in income tax-free Texas, his state and local income tax expenses should be much less.

It makes you wonder why all professional athletes don’t want to live and play every game right here in Houston.

In case you’re curious, a state income tax chart, for the 2017-2018 NBA season, is shown below. It compares the state taxes that affected players such as Stephen Curry, LeBron James, and James Harden.

State Tax Chart Curry vs James vs Harden

Go Rockets! #runasone