How and Why Pro Athletes In The US Often End Up Destitute

[The following post is by TDV Chief Editor, Jeff Berwick]

Derek Jeter’s retirement has come at a price.  As he played his final games in baseball parks around the US, he was given gift-after-gift. And, with each gift, his tax headache grew. Reports state he could owe $16,000 in taxes on his $33,000 in gifts – things like vacations, wine, surfboards, kayaks and framed jerseys.

Because these gifts are not given out of “detached and disinterested” generosity, they are taxable.  And Barack Obama and his group of henchmen want their cut.  After all, Derek Jeter “didn’t build that”.

It’s a fitting cap to a long career in which I am sure Jeter became very aware of how taxes work. As a pro athlete, he’s among the most extorted of tax-cattle.

Former Chicago Bears linebacker Hunter Heillenmaeyer and former Indianapolis Colts center Jeff Saturday are suing Cincinnati because of its taxes on athletes.  Very few know this, but most cities tax all visiting players from out of town teams on the games they play in their domain, but Cincinatti took it further, taxing players who were hurt or not even there. 

“Nobody likes paying taxes—that’s obvious—but they should be fair,” says Hillenmeyer. “It was just such an egregious and shameless money grab by the city of Cleveland, it just felt wrong not to try to do anything about it.”

All taxes are “egregious and shameless” money grabs and since they are involuntary, at the point of a gun, they can never be fair unless the tax rate is 0%.

In the US, twenty-one states and eight cities are home to major professional sports teams – like Detroit, Kansas City, and Philadelphia – which tax visiting players, coaches, trainers and others working for the team on the road.

California collected $163.8 million in 2011 from resident and nonresident professional athletes for MLB, the NBA, NHL, NFL, WNBA, golf, tennis, and soccer, according to the state Franchise Tax Board, which openly admits to its thieving. The city of Pittsburgh stole $3.1 million from pro athletes in 2013.

Athletes are sitting ducks for the taxman. They have no control over where they play, and a sector of the public views them as spoiled millionaires who get to play children’s games.

California started the tide of tax when it used income tax laws there to tax Chicago Bulls players, who had beat the Los Angeles Lakers in the 1991 NBA championship, according to Robert Raiola, a New Jersey accountant representing athletes.  The State of Illinois took notice and instituted its own taxes on out-of-state athletes in what’s called “Michael Jordan’s Revenge.”

The cities don’t even offer credits for the taxes they force players to pay. With executives, states generally give them some time before they have to start paying local income taxes. Ohio law says nonresidents who work in a city for 12 or less days in a year don’t have to pay anything. Here is an example about how football’s Pittsburgh Steelers were taxed in one season: 

Of the $2.5 trillion stolen by the federal government for the federal income tax, $3 billion is paid by athletes (3,000 individuals).On average, every MLB, NFL and NBA player pays $1 million in federal taxes.

One clever baseball fielder started getting the idea after he started making millions.

“You definitely look at the bottom-line [tax] figure and you go, ‘Jeesh, that’s a lot of money,’ said Colorado Rockies outfielder Michael Cuddyer. “The first check I ever had to write was like $300,000-plus in taxes…I didn’t even realize I had that much money, and now all of a sudden I’m writing a check for it. It was almost like it was Monopoly money. I was 18 and I didn’t even realize I had that much. It’s all fake.”

Hopefully Cuddyer’s intelligence helps him avoid the unfortunate fate of all too many athletes. 

These tax bills result in mass-bankruptcy among  athletes. 78% of  NFL players, 60% of NBA players and a large percentage of MLB players go bankrupt within 5 years of retirement. Here’s a list of some well-known athletes who have gone bankrupt.

The problems aren’t confined to the top three US sports. Manny Pacquiao has dominated boxing, and a recent win over another boxer Timothy Bradley earned him $20 million, bringing his career earnings to over $300 million. He is gonna need that much. The IRS and Philippine tax authorities want a piece of his fortune, as if it was them who were taking the punches.

Pacquiao is a nonresident alien, which means he does not owe US taxes on money earned in other countries, but his tax bill on money earned in the US is huge.  The Philippines is after 3.3 billion pesos, or $75 million.

In the US foreign athletes have to file US income tax returns and face special withholding rules. They usually have to pay US income tax on their US-based income even if they are only there for a few days, for a fight, like Pacquiao.

WHY MANY ATHLETES GO BANKRUPT

Many athletes in the US, particularly in the NFL and the NBA come from poor areas and have no idea how to handle money.  Many, if told they just got a contract for $1 million per year would instantly think they were super rich.  Millionaires!  As Cuddyer found out, though, nearly have will instantly be absconded by federal, state and municipal governments.  Especially when you add in all manner of other taxes such as property tax and sales tax on anything they buy.

So, pretty much from the start they are really making $500,000/year.  Of course, the sports agent, which usually takes between 5-10% of the gross salary, also.  So, at 10% of $1 million, that is $100,000 for the agent.  The player is now down to $400,000.

Of course, many of them will still think they are wealthy because they make $1 million per year.  As Chris Rock points out here, there is rich and then there is wealthy.

As he says, “Shaq is rich… the white man who signs his cheque is wealthy”.

Getting back to your average $1 million/year athlete, he is now down to $400,000… but where is he going to live?  And what is he going to drive?  All his friends and family think he is rich now and so to lease a Honda Accord and rent a $1,000/month condo just wouldn’t seem right.  And that’s forgetting for the moment the poor players who play in a city like San Francisco where, as of September, 2014, average apartment rent within 10 miles of San Francisco, CA was $3,437/month.

And that will generally get you a fairly non-descript one bedroom apartment.  A starting inside receiver for the San Francisco 49ers can’t live in a place like that… his friends and family would ridicule him.  He’s rich now.  So, he’ll likely rent a 2 bedroom, quite nice condo, for about $10,000/month.

So, now he is down to $280,000 per year.  But what is he going to drive?  He can’t afford a really nice sports car for $280,000 as he’d have no money left for food for that year… so he’ll likely lease one for around $1,500 per month.  He’s now down to around $250,000 and still owns nothing.

But, of course, having become a rich star athlete his friends and family all expect him to pay the bill during get togethers.  It would be on the low end to estimate an average monthly restaurant and bar bill of around $10,000/month.  He’s now down to nearly $100,000 per year.  And that’s before gas, electric bills, phone bills etc etc.

In other words, for your average athlete, by the time all is said and done, their actual disposable income is probably pretty close to $100,000/year after expenses.

Now, if he wisely “invests” that $100,000 per year and goes to your typical “investment advisor” they would likely suggest he put quite a large amount of that in the stock market.  A market that has never been so highly valued in terms of revenue/price (the amount of revenue a company earns compared to its current stock valuation).  There is an incredibly good chance he will lose money there over the next few years.

And even if he doesn’t, he’ll more than likely just keep pace with inflation.  For safety, his advisor will recommend putting some into “risk-free” US Treasury bonds… which are currently losing about 8% per year in real terms.

In other words, even if he manages to play for five years and manages to sock away $100,000 per year after all taxes and expenses, he most likely would haven’t $500,000 in real terms.  If he had put most of it in Treasury bonds he will actually have the equivalent of about $200,000 in today’s dollars… and that is if the dollar even still exists at that point.

Of course, after having lived the “high life” for the last five years it is really hard to ratchet down on the lifestyle you had, especially when you have a wife in tow who was initially attracted to you because you were famous and “rich”… and now you are neither.

And so, now left with no income and less than $500,000 in savings (which are only worth about $300,000 in today’s dollars) he can’t even afford to rent a basic, one bedroom apartment in San Francisco anymore.  His wife leaves him and he is so depressed he decided to kill himself and leave the small amount remaining to his child.

His last thought is that at least his son will have $500,000.  But the government takes 40% of it as a death tax lowering that amount to $300,000… which is worth about $150,000 in today’s dollars.

That $150,000, if his son wants to live in San Francisco, will pay for about two years of living expenses.

SURVIVING AND PROSPERING IN THE US TODAY TAKES MORE THAN A GOOD INCOME

So, the next time you hear someone saying how many athletes today are paid too much remember that they too are mostly impoverished by the government and even more so than your average person.  And many have ongoing health issues for the remainder of their lives on top of it.

The owner of the team, however, will often receive huge tax subsidies, massive tax write-offs and keep the majority of their wealth structured in offshore entities that are legally non-reportable and non-taxable (these are services that TDV Wealth Management offers and you don’t have to be wealthy today to take advantage of them… anyone with a net worth over $500,000 can structure their affairs to that they don’t end up destitute like the poor pro athlete who cannot use these forms of structures due to the nature of their work).

Even for those athletes who have made massive amounts of money, like Felix Trinidad, the boxer, who made $90 million over his career he ended up bankrupt and with $18 million in debt… all by not structuring himself properly and by “investing” the majority of his earnings in government debt instruments (read more here: “Want To Lose All Your Money?  Do What This Boxing Great Did“).

Learn from these mistakes and make sure that the majority of your assets are outside the financial system.  The End Of The Monetary System As We Know It (TEOTMSAWKI) is arriving at an ever-quickening pace.  And your government registered financial advisor is likely clueless as to how to structure what assets you do have properly to protect them and which assets, in particular, to own.  Contact TDV Wealth Management for a consultation on how to properly prepare for the coming collapse if you have a sizable amount of assets and/or income.

If Felix Trinidad had done so he would not be in the situation he is in today.

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