Accounting
TCJA extension or sunset: Gamechangers for professional athletes
Tim Nwachukwu/Photographer: Tim Nwachukwu/Gett
With just over a year to go before many of the provisions of the Tax Cuts and Jobs Act sunset, taxpayers and tax professionals are waiting anxiously to see which, if any, will be extended — and professional athletes, who play as many as half of their games in states other than the one in which their team is located, and may reside in yet another state, are high on the list of those who should be paying attention.
W-2 employees with out-of-pocket expenses may see significant tax savings if Congress allows the TCJA to sunset, according to Miklos Ringbauer, of MiklosCPA, an accounting and tax strategy firm based in Southern California.
“Where possible, athletes may want to consider waiting to pay some expenses until 2026 — when a deduction may be available — versus paying in 2025 (or prepaying in 2024) when the expenses are nondeductible,” he said.
Removing the $10,000 cap on the deduction for state and local income taxes could also be a significant benefit to most professional athletes, Ringbauer observed: “Whether they reside in a high-tax state or low-tax state, since professional athletes incur a ‘jock tax’ as nonresidents of the states and certain cities where they play road games.”
Even if an athlete is a resident of a no-tax state, they may pay significant nonresident state and local taxes from the states and cities where the team travels — which, under TCJA rules, are deductible only up to $10,000.
Under TCJA rules, expenses directly related to endorsement income such as appearances, royalties, sponsorships, and so on (including agency fees, travel expenses, professional fees, etc.) are deductible against business income — which is generally reported on a Schedule C under business profit and loss.
Ringbauer offered this hypothetical example to demonstrate the decisions that athletes must make in planning their career: John Smith is a pitching prospect in Major League Baseball who worked his way through the minor league system. Two teams offer him a one-year contract around the league-minimum salary of $740,000 for 2024. Under the collective bargaining agreement, it is expected to be raised to $760,000 in 2025 and $780,000 in 2026. He had to decide whether to play for a California-based team or a Florida-based team during 2024. After consulting with his tax advisor, he learned that he would be subject to the California state income tax of more than 11% if he signed with the California team, but would not be subject to state income tax if he went with the Florida team because Florida has no income tax.
After considering the pros and cons, Smith signed with the California team. Although he’ll take home less after taxes, the prospect of living in his home state of California plus the future earning potential of playing for a “big-market” team outweighs the short-term savings in taxes in Florida playing for a lesser-known team. He can always come back to the question of claiming residency in another, non-income-tax state later, when his paycheck is bigger.
Business expenses for self-employed athletes such as golfers or other individual sports are deductible under the TCJA — the deduction rules differ for W-2 employees compared to Form 1099 contractors. Many self-employed or independent contractor athletes may use an S corporation for self-employment tax and state pass-through-entity tax planning purposes.
“Certain states that did not conform to the TCJA have allowed a state-level deduction for unreimbursed employee expenses, including California, Minnesota and Pennsylvania,” Ringbauer noted. “This could potentially reduce taxable income, resulting in lower state taxes owed. CPAs should work with professional athletes and their agencies to develop timing strategies for when certain expenses may bring more beneficial tax deductions. The post-election weeks should bring more clarity to whether Congress will allow all or some of these provisions to sunset, or if the TCJA will be extended.”
The Internal Revenue Service may be facing steep cuts in its budget with the win on Tuesday night of President-elect Donald Trump.
Funding for the IRS has become a political issue, with Republicans successfully pushing to cut the extra $80 billion funding from the Inflation Reduction Act of 2022 already during battles over the debt limit.
“I think IRS funding is at significant risk right now, both the annual appropriation funding as well as the remaining IRA funding,” said Washington National Tax Office principal Rochelle Hodes at the Top 25 Firm Crowe LLP.
Win McNamee/Getty Images
So far, Republicans have mainly called for cuts in the IRS’s enforcement budget. The increase in enforcement is supposed to be used to pay for the cost of the IRA, but the funding increase is also supposed to be used for taxpayer service and technology improvements.
“The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?” said Hodes.
The Direct File free tax prep program that the IRA funded could also be targeted, even as the IRS makes plans to
“I don’t think that will be in the sight line, but the IRA money is part of what’s being used for that,” said Hodes. “As we’ve seen in appropriations bills, there could be language directed at that, that no money can be spent on that initiative.”
A more important priority will be the extension of the expiring provisions of the Tax Cuts and Jobs Act of 2017. “Getting TCJA resolved is going to be the first priority,” said Hodes. “The second question is, how will the cost of that endeavor be determined. If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with. I think it will be necessary to see how the scoring goes for extending TCJA provisions.”
Trump has also called for exempting various forms of income, such as tip income, Social Security income and overtime from taxes.
“I also am not sure which of the ideas that were put forward on the campaign trail, other than extending TCJA, are provisions that have true champions who will want to pursue those,” said Hodes.
That may depend on who ends up in Congress, with several important races in the House yet to be decided.
“Although the House remains undecided, the Republicans’ control of the Senate makes it much more likely that Republicans will be able to implement many of Trump’s proposed tax policies, such as making parts of the expiring 2017 TCJA provisions permanent,” said John Gimigliano, principal in charge of the Federal Legislative & Regulatory Services group within KPMG’s Washington National Tax practice, in a statement. “The pressing question now is how the Administration and Congress will fund such an ambitious agenda and what additional measures they might introduce, such as eliminating taxes on tips and overtime. These items will only add to the hefty $4+ trillion price tag they face. Until then, taxpayers should continue to stay apprised of developments and scenario plan for the different outcomes to get ahead.”
Over half of accounting and tax firms plan to increase fees across all services in 2025, according to a new survey.
The
Some 57% of the respondents plan to increase fees across all services. With regard to tax preparation specifically, 90% of the survey respondents plan to increase fees for individual tax returns, and 87% plan to increase fees for business tax returns. In addition, 70% plan to increase fees for tax planning and advisory services;. 85% plan to increase fees for bookkeeping and accounting services; and 76% plan to increase fees for CFO and controller services.
“While accounting firm owners are embracing price increases in 2025, the report shows that the majority (around 58%) cite rising business costs as the main motivator,” said Ignition global president Greg Strickland in a statement. “Only 5% are raising prices to increase revenue, which indicates an opportunity for firms to leverage pricing as a strategic tool to unlock revenue growth.”
The report found a shift from hourly billing to fixed-fee and value-based pricing, with 79% of the survey respondents indicating they use fixed-fee or value-based pricing for bookkeeping and accounting services. Over half (54%) use fixed-fee or value-based pricing for tax preparation services, 67% use fixed-fee or value-based pricing for tax planning and advisory services, and 75% use fixed-fee or value-based pricing for CFO and controller services.
The report benchmarked current fees for tax, accounting and advisory services, which varied based on firms’ annual revenue range. The biggest variation in pricing was for tax planning and advisory services in particular. For firms with revenue of as much as $250,000, approximately 23% said they charge less than $500 for these services, while a nearly equal number (around 21%) indicated they charge more than $2000.
Illinois voters approved a nonbinding proposal to add an extra 3% levy on annual incomes of more than $1 million, which could fuel a new effort to raise taxes on the state’s highest earners.
The ballot measure – which was an advisory
“The vote is a gigantic step in the right direction,” said former Governor Pat Quinn, a supporter of the measure.
Daniel Acker/Bloomberg
While the proposal has no legal effect, the vote opens the door to a new debate over ramping up taxes on the rich even as Illinois and Chicago, its biggest city, contend with population declines and a string of departures by major companies and wealthy residents. In 2020, voters rejected a separate measure backed by Governor JB Pritzker to replace the state’s flat tax on incomes with a graduated system that would raise rates on higher-earners.
The Pritzker plan drew staunch opposition from billionaire financier Ken Griffin, who donated about $50 million to help torpedo the initiative. Griffin then left Chicago for Miami in 2022, moving the headquarters of his Citadel empire there as well. Companies from Caterpillar Inc. to Boeing Co. have also departed amid rising concerns over public safety, regulation and taxes.
This year’s referendum asked voters if the Illinois Constitution should be amended to create the additional tax on income over $1 million. It called for using the proceeds to ease the state’s notoriously high property levies.
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