Those of you who are not Darryl Strawberry will be spending the next few days on your tax returns. Here are a few practical things—and a number of not-so-practical things—that every sports fan should know about his or her taxes.
Your bookie probably won't give you a W-2G
For those of you who enjoy sporting events more when you've placed hasty wagers on the games, gambling is an important part of your tax return. "What? You mean my hot streak of victories guided by betting against Mark Sanchez that paid for my new 106-inch projector television is related to my taxes?" Yep! And it doesn't matter if your bookie doesn't give you a W-2G (don't bother asking for one); those winnings are taxable. If you happen to win big (i.e. more than $5,000) in a place like Vegas, the nice thing is the house will withhold the taxes for you, but otherwise the reporting of gambling winnings is more or less on the honor system. Stupid, right? Who's going to report cash winnings that aren't tracked by anyone? Well, if you had an unusually lucky year and spent all your winnings on loot, the IRS will have lots of questions if you get audited and then can't explain how you paid for all your fancy shit. Of course if gambling is your career, then that makes things even more complicated. You have to gamble enough that it takes up a substantial amount of time and represents your primary source of income. If you're going down this road, then it's best to treat it like a business. Keep good records, keep personal and business expenses separate, and maybe even hire a CPA to advise you. The bright side is that if you're a good customer (read: bad gambler) and you lose more than you win, those losses are deductible, but only to the extent of your winnings. As fruitless as it may be, breaking even makes for a great tax planning strategy.
If you're a small business, you can deduct that computer you used to draft Chris Johnson in the first round last year
If you're looking to get really aggressive with your deductible expenses (i.e. blowing cash), consider starting your own business – more specifically a sole proprietorship - and deduct pretty much anything you want on Schedule C. Want a TV for watching games? Thinking about a new computer to manage your fantasy teams? Those are fixed assets that primarily serve legitimate business purposes! Even better, as a small business you'll likely be able to deduct the whole cost of some these assets. It's called bonus depreciation and Congress loves it. Even better, Congress loves small businesses because apparently you're going to lead the economy back from ruin. The catch? You have to keep good records. And the better records you keep, the more you can get away with. You see, the IRS loves auditing small business owners because they suspect they are underreporting income due to unsophisticated record keeping. Solid records to back up all your reckless spending in the name of job creation will send those shifty IRS auditors packing.
You can deduct those personal seat license fees Alma Mater is chiseling out of you
What about tickets for your alma mater or favorite college sports team? Well, this is a tricky one, so read carefully. Under Publication 526 for 2011, if you donate money to the school and that donation gives you the right to purchase tickets to an athletic event, you can deduct 80 percent of the donation. If you are simply shelling out money for tickets, then that does not qualify as a charitable contribution. For example, if you donate $500 to the school's scholarship fund and that gives you the chance to purchase a ticket to a home basketball game, you can deduct $400. If you're simply breaking the piggy bank to sit in the last row year after year, then your fanaticism may be unquestionable, but it doesn't make for good tax planning.
If you're really true to your school, for God's sake go back! The Lifetime Learning Credit is eligible to any single person whose modified adjusted gross income is below $61,000 ($122,000 for married filing jointly). Co-eds always have a soft spot for the non-traditional student and it's the perfect excuse to drink like you're 20 again.
Jeter's tax defense sucks, too
What if you travel a lot for work? Athletes travel all the time and they deal with all kinds of multi-state (and international) tax issues. Baseball players have it the worst, playing 81 games on the road in several different states and Canada. Players for the Rays, Marlins, Rangers, Astros, and Mariners, have it slightly better only because they play the majority of their games in states that don't have an income tax. There is a big temptation to try and avoid residency in high-tax states like New York for states like Florida to circumvent state taxes. Ask Derek Jeter how well that works. He tried to claim that he was a resident of Tampa, Fla., for 2001 to 2003 because of all the time spent there during spring training and the offseason. But during the season, Jeter was chasing grounders in the Bronx and skirts in the City, laying his head at Trump Tower. That didn't make for a very convincing argument; he eventually settled the dispute.
You're probably wondering if you can take advantage of any these tax-free refuges, and the answer is, probably not. That is, unless you want to take up residency in any of those states. The easiest way to do that is to move permanently to your income tax-free state of choice, establish a domicile (i.e. a permanent home) there, register to vote there, etc. Of course this may not be desirable—the weather in Alaska and Washington is awful most of the time and Texas and Florida are filled with Texans and Floridians. But be careful, there are all kinds of tricky issues out there. For example, if you're domiciled in New Jersey but happen to have an apartment in Manhattan that you frequent, that apartment might be considered a "permanent place of abode" if you spend too much time in the city. You have to literally count the days (keep it under 184) to prove you aren't a resident of New York.
State tax issues are endless and you can try and get creative to avoid state taxes, like living in southern Washington where there is no income tax, and do all your shopping in northern Oregon where there is no sales tax. But rest assured, the state governments will get taxes out of you one way or another. Really, the easiest thing you can do is make the decision LeBron made and pack your bags for Florida.
Buy Packers stock
The opportunity doesn't come around often, so you have to be on your toes but consider: There are no dividends; the stock will never appreciate (hence no capital gains); and if the team is ever sold, all the profits from the sale of the team will go to the Packers' charitable trust. Your tax advisor could, at the very least, make the argument that it is a charitable contribution (deductible on Schedule A) and if that doesn't work, call it a casualty loss (again, deductible on Schedule A). Think about it. Won't it take an act of God for the Packers to actually be sold?
Buy bonds for whatever hideous new stadium your parasitic local team is building at public expense
Is your favorite team's stadium a historically insignificant rotting heap with suspect plumbing? Great! That means ownership is probably interested in razing the dump and replacing it with a garish monstrosity. One option for financing these projects includes issuing bonds known as "private activity" bonds. These are great because they pay interest that is exempt from federal tax (and sometimes state and local taxes). They're not so great because they can be extremely hard to buy (helps if you're already wealthy), they come with all kinds of conditions, and if you're subject to the alternative minimum tax (don't ask) the interest ends up being taxable. You probably remember that this was a big controversy when the Yankees and Mets built new stadiums, which resulted in Congress asking all sorts of questions. So yeah, it might be a long shot, but if you've got a powerful franchise in your town that has political connections, it's not completely outside the realm of possibility that the new stadium will be built with these bonds. If you've got the means and opportunity, it can score you some tax-free earnings.
Buy a team
For those of you that have slightly higher ambitions for your sports fanaticism, things like season tickets or autographed memorabilia may not satisfy you. No, you really need a piece of the team.
This presupposes the obvious—you're loaded and already pay a shitload in taxes. You'd like this franchise to serve two purposes: 1.) Your illogical childhood dream of actually being a professional athlete is somewhat realized by wielding control over the pawns in your expanding empire; 2.) It can work as a tax shelter.
How exactly? Well, if you remember the MLB financial statements that were leaked a while back, you'll recall a little nonsensical benefit that new owners can use when they purchase a franchise—50 percent of the cost of the team can be allocated to the value of the players (a.k.a. depreciable assets) and that gets amortized over five years' time. (Don't try to find the logic in this. A roster doesn't depreciate. Individual players do—a cost borne by the players themselves—but rosters as a whole remain essentially fixed. Prospects arrive and improve; the old guys decline and get cut. But the allowance remains anyway. Thank Bill Veeck for that.) So to use a recent example, the Los Angeles Dodgers were just purchased for $2 billion. Half of that is allocated to the value of the players (i.e. $1 billion) and will be amortized over five years—a $200 million non-cash expense that will hit the club's books. Sure, it's not quite as good of a deal as when Bud Selig allocated over 90 percent of the purchase price of the then Seattle Pilots to payroll, but the numbers are way bigger these days, which means bigger write-offs, which can mean bigger paper losses, which mean lower taxable income.
Violent rec sports can be good for your tax return
Start playing in your hockey rec league again or some other high-collision, injury-rich sport. Medical and dental expenses are deductible but are subject to a 7.5 percent floor of your adjusted gross income. What does that mean? You need to play hard. Really hard.
Do like The Boss
Last but not least—and this is specifically for the 1 percent crowd out there looking for a practical planning strategy—if Congress is ever stupid enough to let the estate tax expire again, take a cue from George Steinbrenner and just die.