Last year, the NFL implemented rule changes for the 2018 season in a concerted effort to improve player safety. These rules, which added more specific confines to tackling, also included heftier penalty fines for illegal tackles. In addition, the NFL maintained the ability to suspend players for off-the-field violations such as substance abuse (PED’s) and various “character” violations that damage the league’s perception. While these rules were put in place to protect athletes and the league, the hefty fines and changes to tax legislation are now resulting in athletes taking more substantial financial hits than before.
Historically, when players were fined for illegal hits, celebrations, and unsportsmanlike conduct, their pay was docked when the ruling came down in the week following the incident (assuming no appeal). Depending on the severity and frequency of the offense, a player’s paycheck could be reduced by more than $112,000 per each on-field infraction. The penalty fees were then put to good use as donations to one of two qualified charitable organizations providing medical and financial assistance to former players in need, the Gene Upshaw Players Assistance Trust or the NFL Player Care Foundation. Due to the charitable use of these fees, fines were deductible against a player’s income, essentially treated as a “cost of doing business”. While the fined player’s paycheck was reduced, he was at least able to avoid paying income taxes on the fine amount.
Now, fines hurt NFL players in more ways than one. The ability to avoid income taxes on penalties has changed with the implementation of the Tax Cuts and Jobs Bill in 2018. Prior to last year, a player would avoid paying taxes on the fined amount by claiming it as an Unreimbursed Business Expense, which was deducted on Schedule A of his tax return under Miscellaneous Itemized Deductions. The Tax Cuts and Jobs Bill has since eliminated Miscellaneous Itemized Deductions altogether, greatly impacting athletes as they often incur a significant number of these.
Let’s put this in perspective with some real numbers. In 2018, football player fines for on and off-field infractions totaled $4,246,073. Assuming similar numbers for 2019 and a maximum individual rate for federal income taxes of 37%, this law change will result in athletes paying roughly $1.6 million in taxes on income they have never received. By adding taxes back to these fines, a standard face mask fine of $10,026 could now actually cost the player almost $14K, as he will pay taxes on that fine as if the money was still in his salary that year and have no recourse to deduct it on his tax return.
But wait, if the penalty fines are donated to a qualified charity, can’t athletes take a charitable deduction for this amount? The answer is no. Because the donations to these charitable entities are incurred against the player’s will and not voluntarily, he is not eligible for a charitable deduction. So, for now at least, the player will see income on his paycheck and W-2 income diverted to the charity. However, he will not see a corresponding deduction from his taxable income. For example, Antone Exum, a free safety for the 49ers at the time, tallied $134,423 in fines during the 2018 season, or 19% of his total season earnings (pre-tax). When you factor in the roughly $58k in taxes he had to pay on this lost income, his $705k total salary was docked roughly 27%.
Another example is Vontaze Burfict. Known for being a tough player on the gridiron who has a history of engaging in acts of questionable legality, Vontaze incurred $112,000 in fines from the week 6 game against the Steelers (an NFL season-high). When you factor in the taxes he had to pay, the fines really cost him close to $159k. That’s significantly more than the $106k he will earn per week with the Raiders this season.
Will the detrimental tax impact encourage players to avoid finable offenses? Probably not. Do players have any recourse? That remains unclear. A good argument could be made that since the fine money goes to qualified charities, they should be able to take a charitable deduction. With the way the law is currently written, however, making that claim on a player’s tax return may draw a false-start penalty of its own.
It’s critical for players to work with a tax professional to understand the full impact of incurred fines, so they can plan accordingly. For more information on how SignaturePRO can help you plan, reach out to the team at SignaturePRO@sigfddev.wpengine.com.