Taxing Issues

A year ago, I pondered if the delay in signing Greg Maddux was due to the tax law changes that took effect on January 1, 2004. Well, this year, it seems that the Carlos Beltran signing may be affected by tax law changes that take effect on January 12, 2005.

ESPN.com has a piece by Darren Rovell on changes in how taxes are calculated off signing bonuses. At present, and since 1958, baseball players have had their signing bonuses exempt from FICA taxes because it was ruled that this money was paid to the player absent services rendered for the income. Therefore, it was not classified as salary and no FICA taxes are paid.

This changes on January 12th. If Beltran signs before the 12th, he can save literally hundreds of thousands of dollars in taxes.

Additionally, were Carlos to sign with either New York team, 50% of his annual income would be taxed at the New York state rate of 8.75% (you only pay state taxes for the hours you work in a given state -- as 50% of the games are home games, he only pays state taxes on 50% of his income). Illinois' rate is only 3%. While this isn't as advantageous for the Cubs as Texas' rate of 0%, it does make the Cubs able to offer less total dollars to Beltran yet have the offered viewed equally as anything the New York team offer.

Interesting article. Accountant types are well advised to read this.