Taxation for Professional Athletes

Taxation for a professional athlete is very much like taxation while saving for retirement, except the saving for retirement is supercharged, happening in a very short span of years instead of over 40 years.

Early Years

Professional Athletes come from a variety of backgrounds. They may or may not have a college education to rely on after their athletic career ends.

Working Years

A professional athlete enters the workforce likely between 18 and 25. The professional athlete will then have their entire career in 5-10 years, earning the vast majority of their income in a very short span. (yes, some are longer - but most are much shorter, doing nothing to provide for the long-term)

While this athlete might earn the same amount over the course of their career as someone who is living paycheck-to-paycheck, the high amounts they earn each year are subject to much higher tax brackets; consequently, they are taxed at much higher rates. That is, this American, instead of paying 5% average taxes every year for 40 years on $25,000 (which would end up being about $50,000 in taxes on $1,000,000), this American might pay upwards of 20% average taxes every year for 5 years on $200,000 (which would end up being about $200,000 in taxes on $1,000,000).

By earning a higher salary, extremely quickly, an American is taxed at a much higher rate than his counterpart that earns the same amount over his career more slowly. The same analysis applies to a musician with a popular but short career or a lottery winner who accepts their savings all at once instead of spread out across several years.

Retirement

This American will have to retire from their sport at an early age. If they saved their money while they earned it, then they will be able to live a traditional retirement at a younger age, but their retirement funds will be stunted compared to their older counterparts because they were taxed at such high rates while they were working. Some money can be deferred until retirement for taxes, but caps on that amount mean that most of it is still taxed at the higher rate.

Death

When this American dies, if there is more wealth left over, then it is passed on like any other wealth that was saved for retirement and unspent. If there is no wealth left over, then death is an uncomplicated matter.