How the TCJA Sunset May Impact Professional Athletes

The tax landscape for professional athletes could change significantly with the upcoming sunset of the Tax Cuts and Jobs Act (TCJA). Enacted in 2017, the TCJA contains several temporary provisions set to expire December 31, 2025.

Professional athletes should stay informed about the potential impacts of the TCJA sunset so they can effectively plan their finances and make any necessary adjustments to their tax strategies.

TCJA provisions affecting individual circumstances

Among various TCJA changes, the provisions greatly affecting professional athletes include:

• Lowering of the top individual tax rate from 39.6% to 37%
• Doubling the standard deduction from 2017 amounts $6,350 (single)/$12,700 (MFJ)
• Adding the “SALT (state and local tax) cap” $10,000 maximum deduction for state and local taxes (including real estate taxes)
• Removal of miscellaneous itemized deductions, subject to the 2% of adjusted gross income floor
• Removal of the “Pease” limitation on itemized deductions, which reduces a taxpayer’s itemized deductions by 3% of the amount a taxpayer’s adjusted gross income exceeded a certain threshold ($261,500 if single in 2017)

Despite lowering tax rates, the TCJA largely increased the federal tax liabilities for professional athletes due to the disallowance of deductions for certain expenses.

Business expense deductions may increase for pro athletes

For income tax purposes in major team sports — including the NHL, PWHL, NFL, NBA, WNBA, MLB, and MLS — players are considered employees of their respective teams, and their salary is reported on Form W-2.

This means, unlike self-employed individuals, athletes can’t deduct business expenses as adjustments to income or as trade or business expenses on Schedule C. Instead, they could only deduct them as miscellaneous itemized deductions, subject to a 2% floor, before the TCJA suspended this category of deductions.

When the TCJA expires in 2026, the reinstatement of miscellaneous itemized deductions — which includes the deduction for unreimbursed employee business expenses — may be very favorable to professional athletes. These deductions are especially valuable for athletes who incur many work-related expenses not reimbursed by their teams or leagues and must be paid out of pocket.

These expenses may include:

• Agency fees (typically between 3% and 5% of an athlete’s annual salary and signing bonus)
• Player’s association union dues
• Training expenses (trainers, gym fees, equipment, etc.)
• Personal coaches (skills coaches, mental coaches, etc.)
• Unreimbursed travel expenses
• Team fines or league fines
• Tax preparation fees
• Investment advisory fees

Starting January 1, 2026, these deductions will once again be allowed, to the extent they exceed 2% of the taxpayer’s adjusted gross income. Despite the lowering of the top tax rate from 39.6% to 37%, often athletes are paying more tax after the TCJA than before.

Tax deductions before and after the TCJA

Here’s an example of a professional athlete’s federal tax return pre- and post-TCJA:

• Professional athlete with annual gross income of $5 million
• Resident of Minnesota (state tax rate 9.85%); annual state income tax paid $492,500
• Agency fee: 4% = $200,000 ($5M x 4%)
• Players’ association union dues $5,580 ($30/day x 186 paid days)
• Annual unreimbursed training expenses: $30,000

Results:

• Federal tax under 2023 rules (TCJA): $1,803,063
• Federal tax under 2017 pre-TCJA rules: $1,732,745
• Federal tax savings under pre-TCJA rules: $70,318

W-2 employees with significant out-of-pocket expenses may see significant tax savings if Congress allows the TCJA to sunset. Where possible, athletes may want to consider waiting to pay some expenses until 2026 — when a deduction may be available — versus paying in 2025 (or prepaying in 2024) when the expenses are nondeductible.

Additional considerations and observations

Removing the $10,000 cap on the deduction for state and local income taxes could also be a significant benefit to most professional athletes. Whether a resident of a high-tax state or low-tax state, professional athletes incur “jock tax” as nonresidents of the states and certain cities where they play road games.

Even if an athlete is a resident of a no-tax state, they may pay significant nonresident state and local taxes from the states and cities where the team travels — which, under TCJA rules, are deductible only up to $10,000.

Under TCJA rules, expenses directly related to endorsement income such as appearances, royalties, sponsorships, etc. (including agency fees, travel expenses, professional fees, etc.) are deductible against business income — which is generally reported on a Schedule C under business profit and loss.

Business expenses for self-employed athletes such as golfers or other individual sports are deductible under the TCJA — as the deduction rules differ for W-2 employees compared to 1099 contractors. Many self-employed or independent contractor athletes may use an S corporation for self-employment tax and state pass-through-entity tax planning purposes.

Certain states that did not conform to the TCJA have allowed a state-level deduction for unreimbursed employee expenses (including California, Minnesota, and Pennsylvania). This could potentially reduce taxable income, resulting in lower state taxes owed.

How CLA can help professional athletes

CLA can work with professional athletes and their agencies to develop timing strategies for when certain expenses may bring more beneficial tax deductions. We’ll continue to monitor whether Congress will allow all or some of these provisions to sunset, or if the TCJA will be extended.

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