With Bryce Harper’s historical 13-year, $330 million contract with the Philadelphia Phillies being the talk of the town within the world of professional sports this week, some of us number-crunchers actually feel a bit sorry for him. While the average fan excitedly calculates Harper’s windfall to be an astronomical $25.4 million per year during that decade-plus timespan, those of us in the back room can only think of one thing – economic reality after taxes.
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Aside from the fact that Harper will continue to be in the highest tax bracket, take into consideration some of the recently proposed Democratic tax agendas for high earners. For instance, Rep. Alexandria Ocasio-Cortez’s, D-N.Y., proposed a 70 percent marginal tax rate for those who make more than $10 million per year. In other words, each dollar above $10 million would be taxed at 70 percent.
While Ocasio-Cortez believes this is fair, given that there have been times in the United States where the income tax rates have been as high as 90 percent, a deeper analytics dive indicates that the deductibility rules during those same times were much friendlier versus the rules of today.
Regardless of such, if a 70 percent marginal rate were to become an actual tax law in the United States, the effect on Harper would be significant. Harper is already subject to not only the highest federal tax rate of 37 percent, but when he plays home games he is also subject to the Pennsylvania state tax (3.07 percent), a local city tax in Philadelphia (roughly 3.9 percent), and the jock tax.
With regard to the federal, Pennsylvania and Philadelphia taxes, this alone puts Harper at about a 44 percent tax rate on his first $10 million per year (roughly - it depends on how many home games are played vs. away, and what those tax rates come in at.)
The jock tax, or the income tax levied against visitors to a city or state who earn money within their jurisdiction, has the ability to push his total bill to more than 50 percent on the aforementioned first $10 million. From a conservative standpoint, let us cap this at 50 percent and say that Harper will take home $5 million out of his first $10 million.
On the remaining $15.4 million, Ocasio-Cortez’s plan would only allow Harper to keep 30 percent; this totals out to an additional $4.62 million. As such, you are reading this correctly: The total take-home pay of a 13-year, $330 million contract utilizing this specific scenario totals in at roughly $9.6 million per year at best. While that take-home amount is still more than what 99 percent of the population makes, it would have to be a major let-down to know that you are only taking home 38 percent of your stated gross pay.
As such, what could Harper do to mitigate this?
Work with his employer to defer his payments.
Certain professional athletes end up hiring advisors who work in their best interest. Much has been made about the financial situation of NBA legend Allen Iverson (another Philadelphia celebrity, no less). However, what a lot of people do not talk about is how a significant amount of his career earnings were stashed away in a trust that he cannot touch until he reaches a certain age.
There are a variety of ways that Harper can do something similar pursuant to any earnings over $10 million. This would allow him to just pay the necessary taxes on his first $10 million and leave his remaining earnings to structurally draw out during any future period(s) of tax favorability (while collecting interest in the interim).
Establish domicile in a state with no income tax.
Florida is famous for not having a state income tax. In addition to this, the Phillies have their spring training within the state. Harper could generally establish domicile in Florida by purchasing or renting a home there and being present within the state for 183 days out of the year. Spending his offseason time, spring training time, and any games in which the Phillies may be playing the Miami Marlins or Tampa Bay Rays within Florida should easily allow him to meet that requirement.
Set up an LLC structure for non-salary income.
Harper is employed by the Philadelphia Phillies. However, as an MLB top-earner, he is sure to take in a lot of endorsement money as well as other means of income. For that non-salary income, it would be in his best interest to consult with his attorney to set up an LLC structure to mitigate his tax situation in that regard. This would allow Harper to legally deduct business-related expenses against that income to help his overall tax situation.
Ravi Ramnarain, CPA, is CEO of Ravi Ramnarain, CPA, LLC