Athletes Find New Way To Avoid Taxes
It felt groundbreaking when Shohei Ohtani did it with the Los Angeles Dodgers over a year ago. By the time Frank Vatrano did it with the Anaheim Ducks earlier this month, it was a certified California trend.
Athletes, like everyone else, don’t like paying taxes. California has a top marginal income tax rate of 13.3 percent, plus there’s the top federal rate of 37 percent, so high-earners like athletes are forking over a lot of hard-earned money. But if the team a player wants to sign with is in California, what can they do to avoid the state’s high taxes? As Ohtani and Vatrano have now done, they can defer the income until they likely won’t be living in the Golden State anymore.
Ohtani famously signed a record-breaking $700 million contract with the Dodgers in December 2023—but with $680 million of that contract deferred, to be paid out equally from 2034 through 2043. If he doesn’t live in California during that decade, he could save between $90 million and $100 million in state taxes. The Dodgers didn’t stop there. “With Ohtani, [Mookie] Betts, [Blake] Snell, [Freddie] Freeman, [Will] Smith, Tommy Edman, Teoscar Hernández and J.D. Martinez,…the Dodgers owe eight players a little more than $1 billion in deferred money from 2028 to 2046,” ESPN’s Alden Gonzalez wrote in December.
The other two teams with combined deferrals above $100 million are, unsurprisingly, also in high-tax states: The New York Mets (top marginal income tax rate of 10.9 percent, plus more if the player lives in New York City) and the Boston Red Sox (top marginal income tax rate of 9 percent).
The numbers in Vatrano’s deal are not nearly as eye-popping as Ohtani’s, but show how it’s not just superstars that are thinking about how to legally avoid California’s taxes. Vatrano’s total contract is $18 million, with $3 million paid out in each of the next three seasons, and $9 million deferred. Similar to Ohtani’s deal, the deferred money will be paid out over 10 years, starting in 2035, when Vatrano will be in his 40s and likely retired from playing in the NHL.
The key to avoiding taxes on deferred payments is paying them out in equal amounts over at least a decade. “A 1996 federal law forbids states from taxing retirement income on out-of-state residents when payments are made in ‘substantially equal periodic’ amounts over at least 10 years,” The Athletic‘s Evan Drellich explained.
Those deferred payments won’t just help at
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