Paul L. Caron

Friday, December 22, 2023

Shohei Ohtani’s Contract Could Save Him $100 Million In Taxes — And Start A Silicon Valley Tax Planning Trend

The Athletic, How Shohei Ohtani’s Contract Could Save Him $100 Million in Taxes — And Start a Silicon Valley Trend:

OtaniShohei Ohtani copycats might start popping up soon — and not only in baseball, where young players might try to pursue lucrative careers as both a hitter and a pitcher. Instead, his deal is resonating in Silicon Valley, where the unique structure of Ohtani’s heavily deferred $700 million contract with the Los Angeles Dodgers has opened the eyes of other high earners.

Pinnacle Peak Advisors, a tax advisory firm catering to the wealthy in San Jose, Calif., keeps fielding questions from parties outside the sports world curious about the workings of Ohtani’s deal. ...

Ohtani this month agreed to play for the Dodgers for a decade at $70 million per season, but from 2024-33, he’ll draw just $2 million per season. Ohtani is deferring $680 million — more than 97 percent of his earnings — until after his 10-year deal with the Dodgers expires, when that money comes back to him in equal annual payments from 2034-43.

When Ohtani receives the bulk of the money, he’ll no longer be under contract with the Dodgers; experts say that the structure of the contract appears likely to save Ohtani between $90 and $100 million in state taxes, so long as he lives outside of California when the deferred money is paid out.

Another key component in potential tax savings is how he has timed the deferral payments, spanning a decade. A 1996 federal law forbids states from taxing retirement income on out-of-state residents when payments are made in “substantially equal periodic” amounts over at least 10 years.

“If you meet a certain criteria, which I believe his contract will meet, then those $68 million annualized payments that occur after the first 10 years … they kind of fall into this quirky little exception, where if he’s not residing in California, at the time, they wouldn’t be subject to a California tax,” said Jeff Daly, a Los Angeles-based accountant and a managing director at Goldman Sachs’ family office. “And the California tax today is north of 13 percent, heading to be north of 14 percent on Jan. 1. So if you do 14 percent on $680 million, you can kind of see that it’s a pretty interesting structure.”

(Hat Tip: Donald Tobin.)

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