The NBA is one of the highest-paying sports leagues in the world.
We’re often dumbfounded by the millions players make, and the numbers per salary cap are increasing almost annually. It’s wild to see numbers like $350 million for a super-max contract, making NBA players super wealthy. However, that’s money before taxes, which the general population often overlooks when peering at those gaudy contracts.
Just like anyone else, NBA players have to pay taxes. These taxes include those on a federal and state level, which add up to a significant amount in some states. We’ll break down some of the details to see how much money elite NBA players pay in taxes every year.
The Hidden Impact of Taxes
Every employed or self-employed person in the USA must pay taxes to the IRS every year. It’s not different for athletes.
Sorting out the documents can be stressful for some, especially if they have higher incomes. Unfortunately, keeping your money safe from the IRS is not possible. There are ways to tweak the taxes, but they cost a lot of extra money, which the general population doesn’t want to pay.
NBA players might, though, considering how high their taxes are. We’re often impressed by the numbers they earn, not knowing that taxes may account for around half of that absurd income.
For example, California has the highest state tax rate at 13.3%, making the LA teams undesirable for many lower-paid players. Lower-paid players might skip LA in free agency simply because the taxes are too high. When you take into account taxes, agent fees, and the cost of living, Southern California can cost you a pretty penny. Of course, there’s the advantage of playing in a huge market that can possibly lead to a massive deal later, but that’s a topic for another article.
Back to the taxes. The first tax NBA players have to think about is the general federal income tax on employment income. So, let’s say that a player earns $30 million annually. If it’s in LA, where taxes are high—even more so for the elite—these numbers can be taxed over 35%. This means that from that $30 million, an NBA player must pay $10 million in taxes, at minimum.
And that’s before the state tax, which can vary wildly. The top rate in California is 13.3%, which means NBA players owe additional money. Then there’s the jock tax imposed by other states where NBA players play. With 82 games in play, 41 at home and 41 on the road, the jock tax is subject to varying rates which clearly add up.
On top of that, NBA players pay high agent fees. For the elite players, it’s usually 3-5%, which is millions of dollars more. The top earners in the NBA often have just less than 50% in taxes to pay, which cuts their contracts in half.
Evading Higher Taxes
We’re not suggesting that anyone should evade taxes.
That’s a federal offense that could result in jail time. However, NBA players and top athletes have been known to invest their money smartly to avoid or reduce taxable income.
One of the most popular and creative approaches to avoiding taxes is life insurance. This is especially true for indexed universal life insurance, which is tax-free. NBA players and high-income individuals can afford such policies. For example, it may cost several million dollars annually, which is a lot, but considering it’s tax-free, NBA players often use it.
Now, these life insurance policies aren’t 100% tax-free. The growth inside them is. These funds can be accessed during retirement. In case of death, the listed beneficiaries receive tax-free benefits. Also, anyone who invests in such a policy can take out loans during retirement, essentially using these funds as tax-free income.
It’s the closest thing to tax avoidance for the rich and elite. Considering the amount they pay in taxes, it’s no wonder why many take up such policies.
Final Thoughts
Managing taxes in the NBA is a very complex problem. Players usually hire specialists to preserve their wealth. Life insurance strategies can pay off, but players need to work with financial and insurance advisors and tax experts in order to make more informed decisions.
That can cost more, but if a good specialist finds a legal way to cut corners, it oftentimes pays off for the highest earners.
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