Saturday, November 6, 2010

The Battle for Cliff Lee (Texas and Taxes)

Let’s start with basic principles.? The first state to get a crack at Cliff Lee’s income is the state where he lives.? Cliff Lee currently lives in Arkansas.? Arkansas has a state income tax, with a top rate of 7%.? So long as Cliff Lee resides in Arkansas, he’s going to have to pay state income taxes regardless of whether his baseball team is based in Texas or New York.

Of course, it’s possible for Cliff Lee to move his family to Texas, in which case he won’t have to pay income taxes to Arkansas.? But Cliff Lee can do this even if he plays for the Yankees.

If this sounds simple to you, good!? Because I’m about to make things a lot more complicated.

Certain states?impose income taxes on people who work in that state but live in another state.? These taxes are called “nonresident income taxes”.? I bet a lot of you are familiar with these taxes.? If you live in New Jersey or Connecticut and work in New York, you’re subject to New York’s nonresident income tax scheme.? ?New York’s top income tax rate is 6.85%.? So if Cliff Lee works in New York, his income earned in New York is going to be taxed in New York regardless of whether he lives in Arkansas or Texas.

Let’s make this more confusing.? Even if Cliff Lee pitches for Texas, he’s going to have to pay New York’s nonresident income tax.? Why?? Because regardless of the logo on Cliff Lee’s jersey, sometimes Cliff Lee pitches in Yankee Stadium.? If Lee performs in New York, he’s subject to the nonresident income tax.? It doesn’t matter whether he pitches for the home team or the visitors.

This is the situation for every major league baseball player.? When Derek Jeter plays in Anaheim or Oakland, he becomes subject to California’s nonresident income tax.? If the All-Star Game is held in Chicago, every all-star becomes subject to Illinois’ nonresident income tax.? ?Most baseball teams are located in states with non-resident income taxes.? The only exceptions are the Mariners, Marlins, Rays, Astros and Rangers.

You have to pity the poor guy who prepares? Derek Jeter’s tax returns (or envy him, since he probably makes a lot of money).? Half of Jeter’s Yankees salary is taxed by the State of New York.? But Jeter plays 9 games each year in Boston, so Massachusetts gets to tax 1/18 of this income.? If Jeter plays three games in Oakland and four in Anaheim, then California gets its share of 7/162 of Jeter’s baseball salary.? Of course, these fractions need to be adjusted if Jeter plays in the All-Star game or makes it to the post-season.? To make things worse, there are cities such as Cleveland and Philly that impose city income taxes on nonresidents.? And when Jeter travels to Toronto … well, let’s leave Canada out of this discussion.

But let’s turn our attention back to Cliff Lee.? Regardless of where Lee plays or lives, he’s going to pay state income taxes to a bunch of different states, and he’s going to file state tax returns that will probably take up the better part of a file cabinet.? But there are things Lee can do to reduce his overall tax burden.? For example, Lee could remain with the Rangers and move his family to Texas.? If Lee’s residence and team were both based in Texas, Lee would not face state income tax liability for the 81 games he played each year in Texas.? In addition, he would not pay state income tax to any state for the games he played in Tampa Bay and Seattle (which, as you doubtless remember, are both located in states that don’t have an income tax).

But if Cliff and Kirsten Lee remain residents of Arkansas, it may not matter from a state income tax standpoint whether Lee remains a Ranger or joins the Yankees.? So long as Lee resides in Arkansas, he’ll owe state income taxes to that state for all of his income, regardless of where he earns it.? True, if Lee becomes a Yankee, he’ll play 81 games in New York, and that will increase the amount of nonresident income tax he’ll have to pay to the State of New York.? But whatever Lee has to pay to the New York tax collector can be deducted from what Lee has to pay to the authorities in Arkansas.? So long as Arkansas has a higher income tax rate than the one in effect in New York, Lee’s overall income tax burden will not be affected by wearing pinstripes.

That is, so long as Lee remains a resident of Arkansas … and does not move to a state with a lower tax rate than the one in effect in New York.

(The amount of money in the Arkansas State Treasury WILL be impacted by Lee’s decision … but that’s a topic for another post on someone else’s blog.)

I’m certain all this is perfectly clear.

Now, about that report that Lee was recently seen buying cowboy boots …

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