4 Essential Tax Planning Tips for Professional Athletes

If you’re a professional athlete, managing your money and tax liability can be intimidating. While you may have high earnings, you’ll want to plan wisely to maintain your wealth and maximize its benefits.

Don’t get stuck making costly mistakes with your taxes that can hurt your financial growth in the long run. To help you, we’ve compiled 4 essential tax planning tips that high-earning athletes need to know.

Tip 1: Utilize All Allowable Deductions and Credits

Conferencing with your financial advisor and Certified Public Accountant (CPA) about deductions and credits available to you is a great start. A financial advisor can help you understand what will benefit you to write off.

In the same vein that an individual that works at home can write off home office expenses on their taxes, professional athletes also can deduct certain job expenses.

Some examples of deductible items for athletes might include:

Travel costs
Training Equipment
Dues and fees (gyms, health clubs, etc.)
Massage therapy
League fees

Since these are all things that contribute to your health and participation on your team, they are most likely deductible. Consult with your advisor and CPA on which deductions apply to the state you’ll be filing under and what makes the most sense for you in general.

You will also want to look at what tax credits you can utilize. Tax credits can be even more favorable than tax deductions because they reduce the tax due, not just the amount of taxable income.

Some examples of credits you may want to take advantage of include the following:

Solar tax credit
Electric vehicle credit
Child tax credit

Many credits are available, some of which have never been on your radar. Sitting down with a trusted financial advisor that can help you find them and sort out how to apply them best will be a crucial part of your tax success.

Tip 2: Leverage Your Tax Bracket

Leveraging your tax bracket is another way to build security for yourself.

A Roth IRA is one way you can leverage your tax bracket. One of the great benefits of a Roth IRA is that the money going into it is taxed but is always pulled out tax-free. That means if you’re in your high-earning years as a professional athlete, you are adding to an account that you can later draw from without paying taxes, but the money will also be compounding and growing over time. This can look like years or, if lucky, a decade or more of tax-free earnings. This is also why a Roth IRA is an appealing option for newer athletes.

As a high-earning athlete, it’s also important to note that the IRS will not allow you to contribute to a Roth IRA if you are above a certain income. If that’s the case, you may look into a backdoor Roth IRA, which means you would roll over or transfer money from your traditional IRA into a Roth IRA. When you convert a traditional IRA to a Roth IRA, you will owe taxes on any money in the traditional IRA that would have been taxed when you withdrew it.

Remember that you can only pull money from your Roth IRA when you are 59 ½ years old and cannot withdraw earnings tax-free until at least five years since you first contributed to a Roth IRA account. These are essential things to remember as an athlete since your athletic career will most likely end long before that era of your life. Proactive planning is crucial.

Different sports leagues provide unique benefits, so check and see if a 401k is available. If it is, you should take advantage of it!

A 401k is an excellent way to save for retirement and reduce taxable income through contributions. Any contributions you make to your 401k come from gross pay (earnings before deductions) rather than dollars already taxed; as a result, you pay taxes on less income, and the funds in the account get to grow tax-free.

Or, you could utilize a Roth 401k which would utilize post-tax dollars for contributions. That means you won’t have to pay any taxes on your contributions or earnings when you withdraw. Depending on what your tax bracket situation is currently, and where you predict you’ll be at the time you withdraw, your 401k strategy might differ. Be sure to work with your financial advisor to determine your best savings path.

Tip 3: Make Donations to Charity

Not only are donations to charity a great way to honor your values and give back to your community, but they can also provide tax benefits.

There are no taxes on any capital gain if you donate cash or securities to charity - and if you take it as a deduction, it will not be included in your taxable income.

You may be subject to a gift tax if you're donating in cash. You’ll want to check with your financial advisor to see if this applies to you and if you can structure your gifts over time instead. Also, don’t forget when it comes to cash donations that are over $250, you’ll need to get a letter of acknowledgment from the charity. And, if you’re deducting $500 or more in noncash donations, you’ll fill out a specific form and include an appraisal of the items.

You may explore contributing to a great cause through a donor-advised fund. This is an account set up for the sole purpose of supporting charities. You can donate assets such as bonds, stocks, or real estate through funds like these.

Tip 4: Focus on Investing in Tax-Efficient Investments

Securities and assets can be considered tax-efficient.

401k investments aren’t just suitable for matching your contributions by a team or company; you can trade, sell, and buy within your 401k account. This is another instance where you must research what your team or company allows, as some employers may allow frequent trading. Employers may limit how often you can trade with your 401(k) money in other situations.

A brokerage account is another way to invest. With a brokerage account, there’s no “bubble,” so to speak, meaning anytime you buy or sell, the capital gains will have to be realized right away.

Being strategic about where your money will go, including to the accounts we’ve mentioned, such as a Roth IRA or a 401k, is all part of asset location, and it’s a great way to make your money work for you, diversify your portfolio, and ideally, minimize your tax liability.

Making it Count

If you’re a professional athlete, you’re in a rare, highly-coveted place in life in many aspects. You’ve worked hard to get to where you are, and you owe it to yourself to ensure that your earnings and taxes contribute to your financial stability and growth.

No matter where you’re at in your journey, we’re here for you. Schedule a meeting today to work with one of our financial professionals and get on track to make sure your taxes are helping you achieve your financial goals.