The sports world is a-twitter (as is Twitter itself), about the news that LeBron James is coming to play for the Miami Heat. In the days leading up to the decision, there was much discussion about how much he would be paid in Miami vs. Cleveland. Because Florida does not have a state income tax (and no city in Florida has a local income tax), the Heat could actually pay him less than other teams, and he would end up taking home more.
In order for a state or local jurisdiction to impose an income tax on someone, there has to be some connection between the individual and the jurisdiction. There are basically two ways that this can happen. First, a state or city can impose an income tax on their residents. If you live somewhere, that place can tax your income, regardless of where you work. Second, a state or city can tax people who work in and generate income there, regardless of where they live. Living in South Florida, the next state is 400 miles away. But there are millions of people who live in one state and work in another (or even live outside of a city and work in that city).
Generally, if you live in one state in which there is a state income tax and work in another state that has a state income tax, your home state will give you a tax credit towards the taxes paid to the state where you work, or the two states will have a reciprocal tax agreement so that you are only taxed in your home state. Either way, there should only be one level of tax and not a double tax. For professional athletes, this is often an accounting nightmare. Athletes have to pay taxes not only to their home state if there is a state income tax, but a proportional tax for each away game they play in a state with an income tax. So a baseball player has to keep track of 81 away games (plus playoffs) and has to make proportional payments for all of them.
Now that LeBron is coming to play for the Miami Heat, it’s possible that he can save on the Ohio state income tax that he had to pay for (1) his home games, (2) his significant endorsement income, and (3) the away games in states that did not have an income tax (such as when the Cavaliers played the Heat). Of course, there is one “simple” question he has to answer to avoid the Ohio income tax.
Where does he live?
Remember, as I said above, if he’s an Ohio resident, then Ohio can asses the income tax against all of his income, regardless of what team he plays for, and because there is no Florida state income tax, there is no credit or reciprocal tax agreement.
LeBron has to establish Florida residency.
I often speak with clients from up north, usually from New York and New Jersey who want to move to Florida in order to lessen their state tax burden. They ask if there is a form that they can fill out that says that they live in Florida, and then they want to go back to their job and home in New Jersey where they spend most of their time. They think that this will save them on state income taxes.
That doesn’t work.
There is no “form” to fill out to truly establish Florida residency, and there is no bright-line test. It is a question of facts and circumstances. And, it’s not Florida that LeBron has to convince (except for the purposes of the Homestead tax exemption), but Ohio.
So what advice would I give to LeBron about establishing Florida residency? He should do as many of the following as he can, preferably all of them:
- Buy or rent a home as quickly as possible (obviously the most important)
- Apply for the Florida Homestead Exemption (if he chooses to buy)
- Get a Florida Driver’s License
- Register to vote in Florida
- Have all of his mail go to his Florida home
- Move his family down here and have his kids go to Florida schools
- File his Federal Income taxes from Florida
- Actually live here during the off-season
- Sell his Ohio home if he can
- Spend more time in his Florida home than he does anywhere else
Again, it’s a facts and circumstances test. The question isn’t “did you fill out the correct form.” The question is, “where do you truly consider your home?” It’s understood that wealthy businessmen, actors, and basketball players making $20 million a year will probably have multiple homes in multiple places. He can have a home in the Hamptons and the South of France if he really wants. But there is only one place that he truly lives, that he considers his primary domicile. If he wants to avoid the Ohio state income tax, he needs to get it into his mind that it’s now Florida.
Welcome to South Florida, LeBron. I hope you win us some championships. Just make sure you remember that this is truly your new home.