Turbo-Taxing The Tour Pros
Like many golf fans, you might have fantasized about making a brilliant shot to capture a tournament and hoisting one of those oversize winner's checks. It's a safe bet your fantasy ended before you had to deal with the tax consequences, but I'm here to tell you they're big -- and only getting more so.
I know, it's hard to generate much sympathy for professional golfers when it comes to their finances. Even after taxes, the average PGA Tour player makes more money in a year than many will see in a lifetime. (Last year, Angel Cabrera was closest to the mean income for active tour players with winnings of $1.26 million. Golf Digest estimates he made another $4 million in endorsements.) Yet their tax situation is worth a look because it raises interesting questions about the nature of income -- and in fact, it might affect where and when golfers choose to compete.
Just like you, tour pros owe income tax to the federal government and the state where they live -- unless their home state has no income tax, like Florida or Texas. They also have to pay income tax to any state where they earn prize money. So a guy like Rickie Fowler, who won money in 13 states with income taxes last year, will have to file 13 separate state returns by April 15.
Seems fair enough to me. The guys competing for the Masters trophy will be, in effect, temporary residents of Augusta for the week of April 4-10. Why shouldn't they contribute to Georgia's Department of Revenue?
What's becoming much more of an issue these days is golfers' endorsement income. Let's say a company pays $1 million a year to sponsor you. Some of this money is considered "personal services": what you get for wearing the logo on your visor, appearing in ads and showing up at a few outings each year. The rest is considered "royalties." This is the money you get for your image and your reputation -- that hard-to-define quality that makes people want to buy products you've endorsed.
You will owe tax on this income in your home country -- and possibly elsewhere if you cross international lines. If you're an American golfer who plays, say, 56 tournament days in the United States and eight in the United Kingdom, the U.K. figures your endorsement income should be divvied up that way -- and taxed accordingly. The IRS holds the same view of non-U.S. golfers playing on our shores. "This has been going on with celebrities since the late '80s, but only recently has it come to light outside the tax community," says Mark Castell, a principal in HPM Partners, a Cleveland wealth-management firm. "The endorsement dollars are so much larger now. And jurisdictions have gotten much more aggressive in going after this income."
Not every golfer is paying up and going quietly away. Retief Goosen, a U.K. resident and taxpayer whose 2010 endorsement income we estimate at $3 million, has a case before the U.S. Tax Court in Washington, D.C. Sergio Garcia, a Swiss resident for tax purposes with an estimated $10.5 million in 2010 endorsement income, also has filed papers and awaits a court hearing. Goosen's lawyers argue that none of his endorsement income is for personal services -- that it's substantially royalties. Garcia's position is that some of his endorsement income is for personal services, but much of it isn't.
This might seem like splitting hairs, but it makes a big difference because U.S. tax treaties with the U.K. and Switzerland treat royalty income differently, and in most cases more favorably, than personal-services income. The more players can get the tax man to recognize as royalties, the greater their take-home pay.
If they don't get what they want, will players like Goosen and Garcia take their golf balls and go home? It's hard to imagine top golfers skipping majors to avoid taxes, but surely smaller events on both sides of the Atlantic could be hurt. There are "dozens of other cases like this in the pipeline," Castell says. "Everyone's waiting to see what happens with Retief and Sergio."
I'm guessing they're in for a fight. "There's definitely a push to get more IRS agents and to staff up in this area," says Mark Chaves, international tax partner with the accounting firm Daszkal Bolton. "If a government gets its teeth into you, they're not going to give up easily."
A Tour Player's 1040
What does a typical PGA Tour player owe in taxes? No two golfers play the same schedule or have identical expenses, but we asked Art Hurley, who manages the Game Plan division of Daszkal Bolton, to run some numbers on a hypothetical golfer. Our guy is a Florida resident who played in 30 events last year (12 of them in states without income taxes), earning $1.25 million on the course and $4 million in endorsements, all in the U.S. After writing off expenses of $1.5 million, our hypothetical pro's federal income taxes would total $1.33 million and his state income taxes $90,000. His net take-home: $2.58 million, or 49 percent of his gross.