I really can’t believe I am saying this, but the Chiefs winning their 3rd Super Bowl in 5 years may not have been the most exciting Kansas City sports news that has happened this month. As an avid baseball fan, perhaps I am a bit biased, but I think the Royals signing Bobby Witt Jr. to the largest contract in franchise history was even bigger than the Chief’s repeat.
As that was happening, I listened to national pundits discuss why someone as talented as Bobby Witt would sign with the Royals when teams like the Yankees or Dodgers would be willing to pay way more. One of those experts pointed out that cost of living and taxes may have played a role in the decision. The commentator pointed out that players are getting wise to just how much states like California and New York are costing them.
He used the recent signing of Japanese superstar Shoei Otani as a perfect example of this. For those of you who are unaware, Otani recently signed the largest guaranteed contract in sports history at $700 million dollars to play baseball for Los Angeles. He however opted to defer $680 million of the earnings until his career is over and will only be paid 2 million per year over the next 10 years.
He is doing this to avoid paying California’s high state and local taxes. Because the bulk of his income will arrive after his career is over and he is no longer living in L.A. he stands to save around $100 million over the life of the contract. https://www.cnbc.com/2024/01/09/shohei-ohtanis-700-million-contract-sparks-deferred-income-tax-concerns.html#:~:text=Deferring%20%2468%20million%20annually%20for,for%20Jobs%20and%20the%20Economy
The impact of this tax loophole is concerning enough to California leaders that State Comptroller Malia Cohen is petitioning Washington to change current IRS tax laws to allow them to still collect taxes on the full $700 million. Given the split party control of Congress presently, a change in tax law is highly unlikely.
I have to admit I applaud what Otani is doing. His actions are shining a bright light on our broken tax system, and the many tax loopholes that are built into it. If I had it my way, we would have a simple and flat tax code where everyone pays their fair share. However, since a flat tax for now is just a pipedream, wise stewardship requires we take advantage of any and all tax breaks made available to us to keep more of our money in our pocket and out of the politician’s. While I doubt many of us have the ability to shelter the kind of money Otani has from taxes, most of us have things we can do to lower our taxable income as well.
Since many of you are in the process of doing your taxes now, I thought I would share a few strategies you might be able to utilize to lower the taxes you or a company you own might owe in the future.
- Apply 2024 retirement contributions to 2023 earnings. The deadline for an individual to make contributions to their IRA for the previous year is April 15. That means working individuals can lower their taxable income by $6,500 before filing their taxes by putting that money in an IRA. If they are over the age of 50 that amount rises to $7,500. If you own a company that has a profit-sharing plan or have a SIMPLE IRA in place the business can make contributions to its employees until March 15 to lower its 2023 taxable income as well.
- Contribute to charities. While the deadline has passed to impact your taxes for last year, its never too late to start developing a giving strategy for 2024 that can significantly lower the federal and state taxes you pay while helping others at the same time. Some of the most effective of these giving strategies include establishing a donor advised fund, donating to groups that qualify for state and federal tax credits, or utilizing Qualified Charitable Distributions to avoid taxes on RMD’s many of you have to take each year.
- Developing a tax deferral plan of your own. Much like Otani, there are often ways to defer income received by you which in turn can lower your overall taxes. Doing things like delaying social security benefits or purchasing certain life insurance policies can give you a way to defer taxes and reduce what you owe now.
Remember, while the Book of Proverbs says “hope deferred makes the heart sick” it doesn’t say anything about deferred taxes doing the same thing.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)