Assessing the State Tax Implications of Deshaun Watson’s Preferred Team

Deshaun Watson, the current quarterback for the Houston Texans, has shocked the NFL by requesting a trade, just one year after signing a record contract. Watson, the 12th overall pick in the 2017 draft by the Texans, has enjoyed the tax-friendly confines of the State of Texas, which does not have a state individual income tax. Watson has listed two teams he prefers to be traded to. Number one is the New York Jets, and number two is the Miami Dolphins. The state of the NFL team that Watson ends up playing for can have significant state tax implications for him.

If Watson were to be traded to Miami, he would also enjoy the State of Florida’s tax-friendly confines, which does not have a state individual income tax like Texas. Therefore, assuming that Watson will also reside in Florida, he would pay no state taxes on home games played in Florida.

If Deshaun Watson is traded to the New York Jets, Watson will play a minimum of 50% of his regular-season games in New Jersey and his state tax situation becomes much more complicated and expensive. Let’s break it down.

In 2020, Watson signed a contract extension that will pay a base salary of $129,540,000 thru 2025 broken down as $10,540,000 in 2021, $35,000,000 in 2022, $20,000,000 in 2023 and $32,000,000 in 2024 and 2025. Watson also received a $27,000,000 signing bonus in 2020.

In the NFL, there are 16 games during the regular season, with the potential for more if preseason is reinstated or the team makes the playoffs. The allocation of a player’s salary to a state is based on duty days, but for simplicity, we will assume an allocation based on their regular-season games only. The 16 games break down as 8 home games and 8 away games.

Therefore, a minimum of 50% of his base salary will be subject to New Jersey individual income tax, which has the nation’s third-highest state individual income tax rate. New Jersey enacted a millionaire’s tax on September 29, 2020, increasing the top individual income tax rate from 8.97% to 10.75% on individuals’ taxable income in excess of $1,000,000 as part of its 2021 fiscal budget.

If Watson is traded to the Jets, at a minimum, his New Jersey taxable income over the term of the contract on only these home games played would be approximately $65,000,000, resulting in $7,000,000 in New Jersey taxes calculated at the top New Jersey tax bracket.

To complicate things more, if Watson is traded to the Jets and becomes a New Jersey state resident, 100% of his salary is subject to New Jersey taxation. (In general, state residents are taxed on 100% of their worldwide taxable income. The state provides a tax credit for some or all the taxes paid by the individual to a nonresident state on income earned in that nonresident state. This reduces the double state taxation problem.)

Professional athletes have many reasons for wanting to be traded to a specific team, often involving the new franchise’s ability to win a championship and the culture of ownership and coaches. However, what can be easily overlooked and underappreciated is the potential tax implications of living and playing games in another state. As you can see from the above illustration depending on where Deshaun Watson ends up, he could be paying at a minimum additional state taxes of $7,000,000 if he plays for the Jets and potentially much more depending on the resident state he relocates to. It is critical for athletes to engage tax professionals on the financial aspects of these complex deals.

For any questions or further information, please contact a member of Withum’s
Sports and Entertainment Team.

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