NBA All-Star Chris Paul is making a move, and a move that will pay dividends for him because of a reduction of state tax payments.
Paul opted into his contract with the Los Angeles Clippers with one year left, allowing L.A. to trade Paul, send him to Houston, and pick up three players and a draft pick in exchange. The last year on Paul’s contract with the Clippers was worth $24.2 million, but Paul can now sign a maximum $205 million, five-year extension with the Rockets as part of the trade.
And that $205 million contract is worth a lot more now than it would be if Paul stayed with the Clippers. How much? Try around $15 million.
In California, Paul paid 13.3 percent state income tax on his earnings, but he will now pay a whopping zero percent in state income tax as a Texas resident. California has the highest state income tax in the country, and it won’t hurt Paul financially to leave the state at all.
Athletes in the U.S. are taxed based on the total amount of “duty days” they play in various states, with the home state obviously comprising of the majority of those days. In the case of Houston and other Texas teams, those duty days aren’t taxed at all. Away duty days are taxed at that state’s respective tax rate. So if a player travels to Illinois, they are taxed at 3.75 percent. However – and this is where it gets complicated – while players pay the respective state income tax where they are playing, they are also obligated to pay whatever difference there might be between that state’s income tax level and their home state’s level. So players for the California teams playing the Bulls will pay Illinois 3.75 percent and California 9.55 percent for, still, a total of 13.3 percent.
Forbes does a great job of breaking it down.
Based on the 2017-2018 schedule, 26.2 percent of Paul’s total earnings will come from games played in states that have a state income tax. At an average of 5 percent, $2.68 million of his contract will be taken out for state taxes playing for the Rockets. Had he stayed in California, that number would be $27.2 million.
Factoring in federal income tax, which actually decrease the total difference because federal taxes are calculated on income minus state taxes, Paul comes away with $122.2 million playing for the Rockets versus $107.4 million if he stayed with the Clippers, for a difference of $14.8 million
His tax payments in California, had he stayed with the Clippers, would be even higher for Paul if President Donald Trump’s new tax plan passes. Under the new Trump plan, state income tax would not be taken out of his total before federal taxes are equated.
In California, Paul is also taxed for his endorsements. In Texas, Paul will pay no state tax at all.
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