With the provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in just over a year, taxpayers and tax professionals are closely watching to see if Congress will extend any key provisions. Among those impacted are professional athletes who play games in multiple states and often reside in yet another state, creating a unique tax situation that requires careful planning. With the sunset of TCJA, W-2 employees, including athletes, could see a significant opportunity for tax savings on out-of-pocket expenses if the law changes, according to Miklos Ringbauer, a tax strategist at Miklos CPA in Los Angeles.

Athletes may find it beneficial to defer certain expenses until 2026, when deductions could be reinstated, rather than paying in 2024 or 2025, when such expenses remain non-deductible. Additionally, lifting the current $10,000 cap on deductions for state and local income taxes (SALT) would provide relief for athletes, many of whom are subject to a “jock tax” for playing in states and cities with high tax rates.

Even athletes who reside in states with no income tax are not exempt from the jock tax, as they must pay nonresident taxes to the states where they play. If the SALT cap is removed, this deduction could become fully available, offsetting some tax burdens incurred in other states. For athletes who earn endorsement income through appearances, royalties, and sponsorships, business-related expenses like agency, travel, and professional fees remain deductible under the TCJA when reported as business income on a Schedule C form.

To illustrate these considerations, Ringbauer shared a hypothetical scenario involving John Smith, a baseball pitcher offered one-year contracts by California and Florida teams for the 2024 season. Though Florida has no state income tax, Smith ultimately chose the California team after weighing the potential future earnings and opportunities in a larger market. Even though he’ll take home less due to California’s high-income tax, the career benefits outweigh the immediate tax savings of playing in Florida.

Self-employed athletes, such as golfers and tennis players, benefit differently under the TCJA rules. These athletes report business income on Form 1099 and may use S corporations for tax benefits. The rules allow more flexibility in deducting business expenses, giving them a strategic advantage in reducing taxable income. Many independent contractor athletes also use S corporations to manage self-employment tax and state pass-through-entity taxes, ensuring their earnings are optimized.

Some states, like California, Minnesota, and Pennsylvania, offer additional benefits by allowing state-level deductions for unreimbursed employee expenses. These deductions can help reduce taxable income, making it advantageous for athletes and high-earning employees to work with CPAs to develop strategies to maximize deductions. By timing expenses and planning, athletes may reduce their overall tax burden and align their finances more favorably in the coming years.

With post-election discussions likely to clarify whether Congress will extend or modify TCJA provisions, athletes and their advisors should prepare for possible tax law changes. Working with knowledgeable tax professionals will be essential for athletes aiming to leverage deductions, manage income across multiple states, and navigate the evolving tax landscape effectively.

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