TCJA Extension or Expiration: Major Impacts for Professional Athletes

Navigating Tax Changes: What Professional Athletes Need to Know as the TCJA Approaches its Sunset

As the clock ticks down to 2026, taxpayers and tax professionals are bracing themselves for potential changes that could significantly affect their financial landscape. Among those closely monitoring the situation are professional athletes, whose unique tax situations place them at the forefront of this impending shift. With many provisions of the Tax Cuts and Jobs Act (TCJA) set to expire, the implications for athletes—who often play in numerous states and may be subject to various local tax laws—are particularly noteworthy.

Understanding the Tax Cuts and Jobs Act

The TCJA, enacted in 2017, introduced a series of tax reforms aimed at stimulating the economy. However, several provisions were designed to sunset after a limited period. This impending expiration raises questions about which benefits will remain in place and which will vanish. For W-2 employees, including those in professional sports, the expiration could bring about notable shifts in potential deductions, particularly for expenses related to their profession.

Potential Implications for Professional Athletes

Tax professionals like Miklos Ringbauer from MiklosCPA highlight how professional athletes may benefit from these changes if the TCJA sunsets. Athletes frequently travel to compete, often playing games in states different from where their teams are based. This dynamic forces them to navigate an intricate web of state and local taxes, including the so-called "jock tax" that targets non-residents competing in certain cities.

One immediate benefit that could emerge if the $10,000 cap on the deduction for state and local income taxes is lifted is the potential for substantial savings for many professional athletes. Whether a player resides in a state with high taxes or no taxes at all, the burden of nonresident state tax obligations can be significant.

Timing Expenses for Tax Efficiency

As athletes assess their financial strategies, the timing of when to pay certain expenses becomes crucial. For example, Ringbauer suggests that athletes might want to consider delaying their out-of-pocket expenses until 2026 when deductions may again be available:

"Where possible, athletes may want to consider waiting to pay some expenses until 2026 versus paying in 2025 (or prepaying in 2024) when the expenses are nondeductible," Ringbauer explained.

This approach could allow athletes to maximize their tax deductions while navigating changes in their careers.

A Case Study: Choosing Between States

Consider the hypothetical situation of John Smith, a pitching prospect in Major League Baseball. Faced with a decision between signing with a California-based team or a Florida-based team, Smith learns that he would be subject to California’s steep income tax rate of over 11%. In contrast, Florida has no state income tax.

Despite the higher take-home pay potential in Florida, Smith ultimately opts for the California team, weighing the benefits of living in his home state and the prestige of playing for a prominent franchise. While he sacrifices immediate tax savings, he bets on long-term gains, highlighting that athletes must strategically consider both their current financial situation and future earning potential when making career-related decisions.

Deductibility for Self-Employed Athletes

For self-employed athletes, such as professional golfers, the rules of deduction differ significantly under the TCJA. Self-employed individuals can claim various business expenses, offering them an opportunity to reduce their taxable income substantially.

Ringbauer notes that certain states, including California, Minnesota, and Pennsylvania, did not conform to the TCJA and still allow state-level deductions for unreimbursed employee expenses. This can provide a valuable advantage, enabling athletes to lower their taxable income and the resultant state taxes they owe.

The Road Ahead: What’s Next for Athletes?

As the potential for significant tax changes looms, the upcoming weeks—including the post-election period—will likely bring new information about whether Congress will allow TCJA provisions to sunset or extend the law’s benefits. Tax professionals play a critical role in guiding athletes through the complexities of decision-making in this volatile environment.

By developing proactive strategies for when to incur expenses and understanding state-specific tax rules, athletes can better position themselves to capitalize on potential deductions and savings in the face of impending changes.

Conclusion

Professional athletes, with their complicated financial structures and multi-state tax obligations, stand to be significantly impacted by the approaching sunset of the TCJA provisions. Engaging in thoughtful tax planning and timing strategies can lead to valuable savings, and staying informed about legislative changes is crucial. With the right strategies in place, athletes can navigate this challenging terrain and emerge with a healthier bottom line.