Phil Mickelson: Is Moving From California a Mistake? Actually, He Should Have ...

I am okay with Phil Mickelson moving from California to another state. We are not talking about a citizen or resident becoming an expatriate and moving to Russia, Singapore or some other country. While California is a good microcosm of US tax and spending problems, we are talking about a person moving to another state. I do not have a problem with this because after all we are the UNITED STATES. States with high taxes, debt and budget problems should be wary that residents may want to leave them as well.

Federal tax law changes beginning in 2013 could further aggravate the situation because of rules applicable to high income taxpayers that could reduce itemized deductions (including the federal state income tax deduction) by as much as 80%, making the net cost of state income taxes more expensive.

While changes to federal tax law may be a catalyst for moving to another state, I actually feel there are plenty of tax reasons why Phil Mickelson should have moved to a more tax friendly state much sooner. Allow me to digress for a bit.

As a tax guy I am always interested in understanding a taxpayer’s specific tax footprint.  Knowing the situation makes me a better advisor regarding what taxes a person is subject to, and which tax reducing transactions and changes a client may want to consider.  While each specific situation should be assessed, the tax footprints of professional athletes usually have several things in common, and professional athletes in the same sport usually have more in common.

Professional athletes who are successful in their sport often are young and have high personal earnings. This combination can be intoxicating and blinding. They are at a point in their lives where it is difficult to assess the economics of what is ahead or fully appreciate from where they have come; they tend to live more in the moment, as if their situation will never end.  Sometimes I like to tell athletes who are thirty or forty years younger than me that they are more likely to retire before me, to drive home the point that their sports careers probably will end while they are still young. For most of them, personal earnings and endorsement income will decline substantially or vaporize while they are still in their thirties and forties.  The message here is that they should not consume their good fortune, which can be fun and ego gratifying, but to save and invest to help fund the next fifty or sixty years of their lives. Admittedly, a few professional athletes may earn so much they will not burn through most of their earnings while living the good life. So how does this fit in with an athlete’s state of residence?

Using Phil Mickelson as an example, perhaps he would have already saved several millions of state income tax dollars if he was a resident of a state with no income tax such as Florida or Texas. If you are not already aware, many professional athletes pay nonresident income taxes in multiple jurisdictions based on where their games or tournaments are played. However, a high income tax state such as California may only give credit for income taxes paid in these other jurisdictions while still applying the higher California rate on these earnings.  More significant, endorsement revenue (which can be a major portion of an athlete’s revenue during his best years) would be fully taxed in California.

I am a fan of Phil Mickelson. I hope he has many more successful years on the PGA tour. Because golfers are still competitive in their forties, as compared to other sports, I suspect Phil already has a more developed perspective on life. Although it is later rather than sooner, I have no problem with Phil changing his state of residence for tax purposes so long as he is otherwise happy with this decision.

 

Phil Mickelson: Is Moving From California a Mistake? Actually, He Should Have ...