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Ohtani could save millions in California taxes by deferring income on $700M deal

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(The Center Square) – Star baseball player Shohei Ohtani could save millions in California by his decision to defer income on his $700 million contract with the Los Angeles Dodgers, in addition to allowing the Dodgers to secure other star players for their roster.

Under a 1996 federal law, Ohtani can be exempted from California’s 14.4% top income tax rate on his deferred compensation if he no longer lives in the state. After 10 years of being paid $2 million per year to play for the Dodgers, Ohtani will begin receiving $68 million in annual payments from 2034 to 2043. Should he follow the lead of top-earning athletes such as Phil Mickelson, who moved from California due to significant increases in income taxes, Ohtani would save over $9 million per year in California income taxes. Whether he moves to a state without income taxes like Florida, or even back to Japan, leaving the Golden State after his 10 year stint playing for the Dodgers could be a prudent financial move.

“He signed a $700 million contract for total compensation but he may be posturing to prevent most of it from being taxed,” said Howard Jarvis Taxpayers Association president Jon Coupal in an interview with The Center Square. “From a tax perspective, he is probably very wise to defer compensation as much as possible to give him options of relocating to another state.”

Ohtani’s deferred compensation also has major benefits for the Dodgers — due to inflation, and the payout is worth approximately $460 million. Because Major League Baseball imposes a Competitive Balance Tax on teams for their total salaries over a certain dollar amount each year — $237 million in 2024, teams do their best to keep their total CBT-calculated salaries as low as possible. Because Ohtani’s playing contract is for 10 years, the annual value of his contract is approximately $46 million — far less than the headline $700 million, or $70 million per year that it otherwise could have been, which provides greater flexibility for the team to hire more star players.

However, Ohtani’s estimated $45 million in annual income from endorsements is another story. Because California residents are taxed on all income, regardless of national or international origin, Ohtani still must pay taxes on all of his endorsement income. While this income does not impact the Dodgers’ CBT, it will greatly supplement the $2 million per year the Dodgers are set to pay Ohtani during his 10 years of playing, ensuring the player will still be earning an eight figure salary as one of the boys in blue.

“It’s a huge incentive in his out years to go play for the Texas Rangers, the Tampa Bay Rays or the Florida marlins because he’d be paying zero income tax if he went to those teams,” said Coupal. “There’s a number of professional athletes who have moved out of state and sometimes it affects where games are played. The agents of professional athletes will put pressure on teams in those situations where it could be played in one venue or another to play in a low tax state because the way the compensation works is that if a professional athlete for a zero-income state plays a professional game in california he will pay taxes on that because he technically worked in California. The bottom line is this: tax policy in specific states has a lot of influence on professional athletes, professional sports teams, and where the games are played.”

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