The TCJA made significant changes to the tax code when it was enacted in 2017, including capping state and local tax (SALT) deductions at $10,000, limiting unreimbursed business expenses for W-2 employees, and adjusting tax brackets. With its expiration date set, many taxpayers stand to benefit if certain deductions are reinstated.
For entertainers, artists, and athletes, the timing of expenses could play a crucial role in minimizing tax burdens.
- Deferring Expenses: Some professionals, including athletes, may benefit from deferring certain expenses until 2026 when deductions like unreimbursed employee expenses may return. Expenses paid in 2024 or 2025 remain non-deductible under current rules.
- SALT Deduction Relief: If Congress lifts the $10,000 SALT cap, taxpayers working in high-tax states could claim deductions for income taxes paid to other states. This change would especially benefit athletes paying the notorious “jock tax.”
Understanding Multistate Taxation
For athletes and performers working in multiple states, multistate taxation adds layers of complexity. These individuals are taxed where they live and where they perform services, often resulting in nonresident income taxes owed to high-tax jurisdictions.
For example:
- An athlete living in a no-income-tax state like Florida or Nevada must still pay non-resident taxes in states where they compete or perform.
- If the SALT deduction cap is lifted, taxpayers could deduct these expenses fully, reducing overall liabilities.
Strategic Planning for Tax Savings
Athletes, artists, and entertainers should consider the following strategies to optimize tax savings:
Leverage Business Expense Deductions
While unreimbursed employee expenses remain non-deductible under the TCJA, self-employed professionals and independent contractors benefit differently. These individuals report income on Form 1099 or through S-Corporations, which allow business-related expenses to be deducted.
Examples of deductible expenses include:
- Travel and lodging
- Agency fees
- Training costs
- Equipment and supplies
Timing Is Everything
Carefully plan the timing of major expenses. For example:
- Defer large expenses until after 2025, when these costs could potentially become deductible again for W-2 employees.
- Take advantage of current TCJA provisions, which still allow deductions for business expenses reported on Schedule C.
Explore State-Level Benefits
Some states, including California, Minnesota, and Pennsylvania, allow deductions for unreimbursed employee expenses at the state level. These deductions can provide significant savings for those working in high-tax states.
Optimize Entity Structures
Self-employed professionals often use S-Corporations to reduce self-employment taxes and manage state pass-through entity taxes. This strategy provides flexibility and tax savings, particularly for athletes and independent contractors.
A Case Study: Tommie “Rocky” Bradie-LeMeiux
To illustrate the complexities of multistate taxation, consider Tommie “Rocky” Bradie-LeMieux, a hockey player deciding between contracts in California, Nevada, and Florida. Though Florida and Nevada have no state income taxes, Bradie-LeMieux ultimately chose California for its career benefits and family ties.
Here’s what he considered:
- California’s high tax rates will reduce his take-home pay, but potential future deductions could offset this burden if SALT caps are lifted.
- He carefully evaluated the potential tax savings of living in Nevada or Florida versus the long-term benefits of opportunities in California’s larger market.
A Hypothetical Example: Alexis “Ace” Hart
Alexis “Ace” Hart, a star collegiate basketball player, signs an NIL agreement worth $500,000 with a major sports apparel company in 2024. Alexis is a resident of Texas, a state with no income tax, but earns income through endorsement appearances in California and New York, both of which have high state income taxes.
Under the current TCJA rules, Alexis reports NIL income on Form 1099, which allows deductions for business-related expenses such as travel, marketing, and professional agent fees. However, Alexis’ tax burden increases due to nonresident taxes owed to California and New York.
If Congress removes the SALT cap in 2026, Alexis could deduct state income taxes paid, significantly reducing the overall tax liability. Working with a tax attorney, Alexis structures NIL income through an S-Corporation, leveraging pass-through entity taxes to further minimize the tax burden while remaining compliant with multistate tax laws.
What Happens Next?
Post-election discussions will likely determine whether Congress will extend or modify TCJA provisions. Potential changes to SALT caps, tax brackets, and unreimbursed employee expense deductions could reshape financial strategies for entertainers and athletes.
To stay ahead, it’s crucial to:
- Monitor legislative developments.
- Work with knowledgeable tax attorneys who specialize in multistate and complex tax situations.
How Omnus Law Can Help
Omnus Law’s team of expert tax attorneys is dedicated to providing comprehensive tax compliance, advisory, and consulting services. We specialize in serving entertainers, artists, and professional athletes navigating complex tax landscapes. Our services include:
- Multistate tax planning and compliance
- Business entity structuring
- SALT deduction optimization
- Customized tax strategies to maximize savings
Let’s Prepare for What’s Next
The tax landscape is evolving, and it’s critical to stay proactive. With the potential for significant changes on the horizon, entertainers and athletes must plan carefully to protect their earnings and minimize tax burdens.
At Omnus Law, we’re here to guide you through these challenges with tailored solutions. Contact us today to discuss your unique situation and discover how we can help you preserve, enhance, and pass on your wealth to the next generation.
📧 Email at reneecoulter@omnuslaw.com