Tax Strategies for Professional Athletes with Matthew Burke
Many professional athletes come into their wealth at an early age, but may not be prepared to manage such a sudden, large influx of earnings. Connecting athletes with trusted advisors is imperative to ensure that these individuals are able to make their wealth last throughout their lifetimes — not just at the peak of their careers.
Matthew Burke is a managing partner for Singer Burke, Certified Public Accountants based in California. Singer Burke has provided business management, tax accounting and financial planning services in the entertainment, sports and media professions for more than four decades.
Charles Frazier, entertainment banking team lead at City National, sat down with Matthew Burke to discuss tax strategies and how they relate to an athlete's financial well-being.
Q&A With Mathew Burke
With the recent NFL and MLB drafts and the upcoming NBA and NHL drafts, what are some things new professional athletes should be thinking about in terms of their finances?
Everything up to the draft has been about making sure the athlete has done everything needed to get drafted.
At the time of the draft and the days leading up to it, the role shifts. The athlete becomes the coach and it's time for them to fill their bench, or "complete their squad." This is the time when an athlete should pick a team of trusted advisors — meeting with and establishing relationships with an agent, a CPA, a banker, a financial advisor and an attorney.
What is typically the first piece of advice you provide to a new professional athlete from a tax standpoint?
I tell them that even before they pick an agent, talk to the agents and find out how successful they've been able to negotiate the uniform player contract, especially as it relates to the tax consequences. It's important that the agent that an athlete chooses to work with has experience working with a CPA and understands the importance of tax planning.
Before any uniform player contract is signed, the first play is always tax planning, which allows all the elements of the financial plan to come together in the most tax-efficient way. The difference between a multi-million-dollar contract with tax planning and one without tax planning could be the difference between taking home millions of dollars and taking home hundreds of thousands of dollars.
For example, let's say you are a professional athlete from California who played in college for a California university, and purchased a home in California. Then the athlete gets drafted by a team in Pennsylvania. Which state does he or she pay tax in? The answer: They pay tax in every single state they play in! They have a name for that: It's called the “Jock Tax." This is why the first play is tax planning before signing the contract.
Before negotiating their contract, what advice would you provide to the player's agent — to help maximize tax strategies — after understanding where the professional athlete will play?
Even if they have prior experience, agents may not have thorough knowledge of the latest available tax-planning strategies, especially under the new tax law that became effective in 2018.
Players need to make sure their agent will be working with a CPA. We work with agents and help them formulate different scenarios for signing bonuses, residency alternatives, tax entity structuring of endorsement deals, and future income that may qualify for the QBI (Qualified Business Income) deduction under Section 199 Cap A — a tax law that permits a deduction not previously available before the 2017 tax year.
Because each situation is unique to the individual, the best advice I can give is to talk to the CPA specifically about the player's residency and tax-planning strategies. The athlete needs to bring in the banker and financial advisor to discuss how the salary and bonuses will be received based upon the timing and structure of the player's contract. Do the tax planning first, figure out when the cash is going to be received, make sure it's received securely by the bank — and then talk about investment planning.
The new tax law states that an agent's fee is no longer tax deductible. Given that, what strategies are you advising your clients to use?
We are actively in discussion with our clients on how to focus on their specific contracts — both the player contract as well as the endorsement contracts — to see what language we can place in those contracts that can be negotiated to their advantage to deduct some of these expenses or transfer or assign some of these expenses so they are tax deductible going forward. We can also focus on residency to reduce the tax rate as well as on the payment structure.
When does a professional athlete need to contact their CPA?
Whenever life is going to change for the unexpected, that's always a time to call a CPA. Things like free agency, income stream change, or a change in career location are always reasons to call a tax planning advisor. In general, an athlete should always talk to their CPA on an annual basis at minimum.
What would you say to seasoned professional athletes who may be negotiating a second or third contract?
For the seasoned athlete, contract negotiation time provides a window for a full financial check-up that takes into consideration both the athlete's career and retirement goals. Everything should be reviewed before the athlete signs a long-term contract — residency, additional streams of income, endorsement income, cash flow scenarios, and tax implications. Also, disability insurance becomes more important as the contracts get bigger.
How does working with a bank like City National support your clients' objectives?
One of our core values is the right relationships. We believe in sustaining relationships with colleagues, clients and the greater community that are authentic, personal and proactive. So having the right banking relationship is essential — and we've had a relationship with City National Bank for more than four decades.
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