Tax Advice for Any Golfer
Illustration by Brian Cronin
PGA Tour stars tend to congregate in Florida, Texas and Nevada—and not just because they like fresh-squeezed orange juice, 10-gallon hats and roulette wheels.
They make their homes there because of something those locations lack: state income taxes.
One of the reasons that some non-American tour pros live in places like the Bahamas, the Cayman Islands and the British Virgin Islands is that these countries impose no income tax. Unlike U.S. citizens who must pay federal income tax on their worldwide incomes, regardless of where they live, most international players can escape nearly all income taxes in their original home country by moving to a tax haven and establishing their primary residence there.
The financial benefits are huge. When you earn more than $1 million a year, making your home in a tax haven or no-income-tax state could save you hundreds of thousands annually.
Phil Mickelson caught some flak for complaining about his big California tax bill in 2013. One can argue whether it was bad form to gripe about it publicly, but this much is undeniable: He does pay a lot more in state taxes than many of his fellow tour pros. Assuming Phil and his wife, Amy, are filing jointly, the Mickelsons pay the state about 13 percent of their taxable income. That adds up: Before expenses, Golf Digest estimates Phil earned more than $37 million in on- and off-course income in 2016. Pros like Dustin Johnson (Florida), Jordan Spieth (Texas) and Ryan Moore (Nevada) can keep that state tax money for themselves.
Most of us don't have the luxury of moving to another state or country to save on taxes, at least in mid-career. But what about in retirement? Should we follow the tour pros' lead and make our homes in areas with no state income taxes?
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don't have state income taxes. Two more—Tennessee and New Hampshire—tax interest and dividends but not paychecks.
Retirement advisers say it's fine to consider income taxes when deciding where to live. Just don't go crazy with it.
"Obviously there are financial advantages to living in a no-income-tax state, but you need to look at more than that," says Rocky Mengle, a state-tax specialist with the research firm Wolters Kluwer Tax & Accounting. "Your overall tax liability in a state is going to include sales tax, property tax, maybe even an estate tax." Rates vary widely. Keep in mind, too, that many states have special rules for retirees making them more appealing than they might seem on the surface.
In Mississippi, Illinois and Pennsylvania, retirees pay no state tax on their Social Security income or withdrawals from IRAs, 401ks and pensions. Result: If you're mainly living off your retirement accounts, you're not paying a lot of state income tax.
In Georgia, you won't owe tax on your Social Security income. And if you're 65 or older, you get an exemption on your first $65,000 of most other types of retirement income. That's $130,000 per married couple.
Twenty-two other states have similar (if not quite as generous) tax exemptions on income from pensions and other qualified retirement accounts.
And just because an area might be known for high property tax, don't assume you'll have to pay the same rate as everyone else. Some states offer seniors a break. Homeowners 65 and older in South Carolina and most counties in Georgia, for instance, get a "homestead exemption" that reduces their property tax.
Kiplinger's website has a comprehensive "State-by-State Guide to Taxes on Retirees." You can click on any state and learn about everything from whether it taxes Social Security to estimated property taxes to special senior exemptions.
A handful of other groups produce rankings of state tax burdens that you can look up online.
WalletHub.com, a personal-finance site, has one that ranks states in order of their taxes on low-, middle- and high-income earners. You can Google "WalletHub best states to be rich and poor" to find it.
Alaska, Wyoming and Nevada do well across the board. But you'll notice that many other states get good marks for some taxpayers and terrible marks for others. Washington state, for example, is No. 11 for those making $150,000 a year. Yet it drops to No. 44 if you're making $50,000 a year and all the way to No. 51 (including the District of Columbia) if you're getting by on $25,000.
"You see that a lot," says Jill Gonzalez, an analyst at WalletHub. "The no-income-tax states rely on very regressive tax systems that lean more heavily on people with lower incomes. Sales taxes, excise taxes and property taxes are higher in these states. The top 2 percent of earners are really getting the best deal."
Keep in mind, states with low taxes often have higher-than-average housing and medical costs.
THE PART-TIME PLAY
What if, instead of moving to a low- or no-income-tax state, you bought or rented a home there and lived in it part-time?
For those who can afford it, that kind of move can produce big income-tax savings.
The important thing is, you really have to make the new home your main residence. You'll usually need to spend 183 days or more per calendar year there and be able to prove it with receipts from local vendors, ATMs and the like. To establish that it's your main home, you'll also want to do things like register your car, vote, have your bank account and see your doctor there, tax advisers recommend.
Let's say you meet all those criteria and have made Florida your main residence while keeping a second home in a high-tax state. You might still owe some income tax to your old home state, depending on how and where you earn your money, but it will most likely be way less. If you're a retiree living entirely on Social Security and cash from your qualified retirement plans, you might be able to cut your state income-tax bill to zero.
Still, no one should move anywhere for tax reasons without consulting a qualified expert first. "So much of this depends on what type of income you have and what you're going to be spending it on," Mengle says. "We recommend you go to a tax professional and have them work up an analysis for you specifically."
And don't stop there, says Christian Weller, professor of public policy at the University of Massachusetts Boston and a senior fellow at the Center for American Progress. "Nobody likes to pay taxes. I get that," he says. "But it takes on this outsize importance. Healthcare and housing, in my view, are the things you really ought to focus on."
Last year Weller co-authored an exhaustive study of all 50 states and Washington, D.C. for the National Institute on Retirement Security. One clear message: States with low taxes often have higher-than-average housing and medical costs.
Florida, for instance, had the highest out-of-pocket expenses for Medicare patients and the 10th-highest housing costs. With Nevada, Illinois and California, it ranked worst in cost of living for seniors.
North Dakota and Wyoming were tops in this category, followed by Alaska, Arkansas, Iowa, Minnesota and Montana.
For Americans, there really is no escaping the long arm of the Internal Revenue Service. We owe federal income tax no matter where we live.
Those rules don't apply for non-U.S. citizens. This is why you see top golfers like Justin Rose and Thomas Aiken owning homes in the Bahamas. Or Mathias Grönberg and Søren Hansen settling down in Monaco. Or Sergio Garcia and Adam Scott officially residing in Switzerland. These countries, and others like them, offer big tax incentives for wealthy people to relocate.
To do so, a player has to cut off his old residence status in his home country, says Stephen Gray, a London-based tax attorney. If the player is a British-resident taxpayer, his tax-residence status in the United Kingdom depends on a handful of factors, including how many days are spent there per fiscal year, whether he has a family still living there, or if he still has a home there. Assuming that the player meets the test of being a nonresident, he will no longer owe income tax to the U.K. on money earned outside of its borders. (Winning a tournament inside the U.K.—such as the Open Championship—would still be fully taxable at rates up to 45 percent.)
Now, let's say you want to make your home in the Bahamas instead. To become a permanent resident with the right to work (i.e., earn money), you have to invest $500,000 in a business or residence. It generally takes about six months to set up, says Bahamas immigration lawyer Clement T. Maynard III. If you're willing to invest $1.5 million, there's an expedited service that will usually make you a permanent resident in about six weeks. Permanent residents don't have voting rights in the Bahamas, but they do enjoy the same Bahamian income-tax rate as other citizens: zero.
Switzerland is a little different. It does tax income, but it allows certain non-Swiss residents who don't work in Switzerland to pay a negotiated "lump-sum" amount. This agreed amount is not based on the person's income but on the amount of living expenses. The agreed sum is invariably a much smaller amount than the person would pay living in his home country. (Some regions of Switzerland do not provide for this benefit.)
The only way for Americans to take advantage of these tax havens and special deals would be for them to formally renounce their U.S. citizenship, Gray says, which means that they must have another one already in place. There are countries that sell a new nationality "over-the-counter." But a renunciation of U.S. citizenship might trigger a costly "exit tax," as if the taxpayer had sold everything he or she owned all over the world. Plus, if the renunciation is held under the law to be for tax purposes, then the family of the former citizen would pay a hefty "penalty" tax on any gifts received from that person or on any property inherited at his or her death.
One little-known tax break available to U.S. citizens can be found in Puerto Rico. As of 2012, Americans who make Puerto Rico their official residence owe no local or federal income tax on dividend or interest income earned within the commonwealth. Nor do they owe tax on capital gains that arise after moving to the island.
They don't escape U.S. taxes completely. They have to pay federal income tax on interest and dividends from investments within the 50 states and D.C. But still, for many taxpayers this represents a haven-like break without having to give up their U.S. passport.
Plus, year-round golf weather.
THE FAVE FIVE
Our best states for golfers earning $150,000-plus per year
Alabama: There's an income tax, but other taxes are generally low, and its RTJ Golf Trail is the ultimate collection of public courses.
Florida: An obvious choice, but how can you not consider it? There's no state income tax, and they don't call it the Sunshine State for nothing.
Nevada: Not much of a gamble here, either. There's no state income tax, and you'll have dependable golf weather for most of the year.
Texas: Though its sales tax is high, the Lone Star State has no state income tax, and it has good weather and more than 800 courses.
Washington: Sure, it rains a lot. But Washington still averages 262 playable days a year, according to Longitudes Group. Plus: no state income tax.
TAXING TASK: FILING FOR TOUR PROS
Tour pros have it tough at tax time. Well, their tax preparers do, anyway.
Golf pros compete for prize money in multiple states, and those states expect to take their cut in taxes. This means that, in addition to their federal 1040s, players are supposed to file tax returns in each state where they play.
Most states these days make tournaments withhold state taxes from players' winnings, says Jim Palsa, a CPA who handles taxes for a PGA Tour professional.
Palsa gets a notice from the PGA Tour every month telling him how much the player made, and where. He can see which states don't withhold—Virginia and Alabama are two.
Could he maybe just... forget to file those state returns? "Our feeling has always been to file everywhere," Palsa says. "If you don't file in a state, there's no statute of limitations. Then you're looking at interest and penalties."
Some states have been coming after players' endorsement income, too. Let's say you had $1 million in endorsement contracts and spent 10 percent of your days this year in California. The state would expect you to pay income tax on 10 percent of that $1 million.
For a closer look at the tax return of a typical PGA Tour player, we consulted Florida-based Art Hurley, who specializes in professional athletes and entertainers as partner in charge of the Game Plan division at the accounting firm Daszkal Bolton LLP.
Hurley ran the numbers for us on a hypothetical player who earned $1.37 million in tournament purses last year and $450,000 in endorsement income. This player competed in 29 events in 17 states, plus Puerto Rico, Mexico and Canada. Hurley calculated expenses of about $760,000, including agents, caddies, transportation, lodging, meals, swing coach and a personal trainer.
This data is based on 2015-'16 season of Patrick Rodgers, whose winnings were close to the median figure on the PGA Tour last season. Note that these aren't Rodgers' actual expenses, so we can't be sure they reflect his true tax situation. But they show how it works.
How much did our hypothetical player owe in taxes? Just under $457,000, meaning—bottom line—his bank account was $597,000 larger at the end of the year. No question, that's a lot of money by nearly anyone's standards. But consider that it represents just 33 percent of our player's $1.82 million gross income and 56 percent of his net income after expenses.
Some other highlights from Hurley's number-crunching:
▶ Our player's biggest tax bill came from the IRS ($385,000).
▶ He earned his largest payday in Connecticut ($391,000), and it cost him. He owed the state around $17,700 in income tax on his winnings and another $430 in income tax on his endorsements.
▶ Florida took no such bite from his $142,000 in tournament earnings there, because it has no state income tax. But it saved him most on his endorsement income. As a Florida resident, he was in the state 213 days during the year, or 58 percent of the time, meaning that 58 percent of his $450,000 endorsement income was not subject to state income tax.
▶ His highest tax rate was in Mexico, where the $92,000 he netted (on a $146,000 tournament prize) at a PGA Tour event was taxed at a total of almost 31 percent.
▶ There were four states (Alabama, New York, North Carolina and Ohio) where he competed and missed the cut. Those states can tax a percentage of his endorsement income based on the number of days he was there. But because of his expenses, he was able to show a net loss in those states, meaning he owed no state income tax in any of them.