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The worst category for this is star professional athletes. They make huge amounts of money their first few years, but then they retire at age 30 and spend the r

The worst category for this is star professional athletes. They make huge amounts of money their first few years, but then they retire at age 30 and spend the rest of their lives earning far less. In the author's case, you could imagine a fix; the author could somehow amortize the income over previous years and pay all the money at the appropriate rate. (Though I can imagine a number of fraud- and incentive-related issues there.) But you can't really do that with the pro athletes because a) you don't know when they'll actually stop making money and b) in the future they may not actually have it.

hkmurakami 13y ago
I remember ichiro's last contract with the mariners was going to be paid out over 25 years or something. The guy makes a ton from commercials in japan, but maybe this is actually a decent move? Edit: on second thought since star athletes are getting paid in the millions, prorating it over 20 years won't change that much in the grand scheme of things. Maybe something like 400k*20% each year before they hit the max bracket anyways.
- icambron 13y ago
  Interesting. From Wikipedia: > The Associated Press reported that Ichiro's contract extension defers $25 million of the $90 million at 5.5% interest until after his retirement, with payments through 2032 If he retires at the end of next year, he'll make that money over 18 years. If he made it all at once, today, he'd pay about 9.8 million of that 25 in taxes (just punching things into a naive tax calculator; I'm sure his accountants would improve things. OTOH, it's also slightly low because it puts him in a lower tax bracket for the first 400K, which he doesn't get because of the other income he has). Ignoring the interest for a moment, splitting 25 million over 18 years he pays a total of 8.9 million. So he saves a million dollars doing it this way. Not bad. With the interest, he'd get paid more; it looks like 1.8 million per year for 18 years, so 32.4 million instead of 25. That's a bit of a raw deal if he has to pay that as regular income tax, since if he got the money now and put it in the market, it would perform about as well, but would get taxed at a capital gains rate. All in all, I suspect this is a compromise with the Mariners to alleviate cash flow and luxury tax pressure more than it's a shrewd tax move.
001sky 13y ago
Even worse are pehaps pop-stars. Rappers in particular strike me as very prone to this. Its hard to create hit<album<multi platnum and then repeat. But if you don't repeat, you just average. And if you get rich quick, the tax hit is big. And the denominator grows by all those years you don't have breakout success...
- icambron 13y ago
  Fortunately, they continue to earn royalties. You can certainly quibble about whether latest-hit-centric music culture makes that big enough to offset the upfront tax hit, and even whether they get a reasonable share of that residual revenue, but it's something.
  - 001sky 13y ago
    This is a good point, as for atheletes this option is less open to them. And in something like the NFL the career is much shorted that MLB. Only a very few will make concession revenues or have game royalties. Maybe some will become coaches or TV personalities, but that is likely a small number.

hkmurakami 13y ago

I remember ichiro's last contract with the mariners was going to be paid out over 25 years or something. The guy makes a ton from commercials in japan, but maybe this is actually a decent move? Edit: on second thought since star athletes are getting paid in the millions, prorating it over 20 years won't change that much in the grand scheme of things. Maybe something like 400k*20% each year before they hit the max bracket anyways.

icambron 13y ago
Interesting. From Wikipedia: > The Associated Press reported that Ichiro's contract extension defers $25 million of the $90 million at 5.5% interest until after his retirement, with payments through 2032 If he retires at the end of next year, he'll make that money over 18 years. If he made it all at once, today, he'd pay about 9.8 million of that 25 in taxes (just punching things into a naive tax calculator; I'm sure his accountants would improve things. OTOH, it's also slightly low because it puts him in a lower tax bracket for the first 400K, which he doesn't get because of the other income he has). Ignoring the interest for a moment, splitting 25 million over 18 years he pays a total of 8.9 million. So he saves a million dollars doing it this way. Not bad. With the interest, he'd get paid more; it looks like 1.8 million per year for 18 years, so 32.4 million instead of 25. That's a bit of a raw deal if he has to pay that as regular income tax, since if he got the money now and put it in the market, it would perform about as well, but would get taxed at a capital gains rate. All in all, I suspect this is a compromise with the Mariners to alleviate cash flow and luxury tax pressure more than it's a shrewd tax move.

001sky 13y ago

Even worse are pehaps pop-stars. Rappers in particular strike me as very prone to this. Its hard to create hit<album<multi platnum and then repeat. But if you don't repeat, you just average. And if you get rich quick, the tax hit is big. And the denominator grows by all those years you don't have breakout success...

icambron 13y ago
Fortunately, they continue to earn royalties. You can certainly quibble about whether latest-hit-centric music culture makes that big enough to offset the upfront tax hit, and even whether they get a reasonable share of that residual revenue, but it's something.
- 001sky 13y ago
  This is a good point, as for atheletes this option is less open to them. And in something like the NFL the career is much shorted that MLB. Only a very few will make concession revenues or have game royalties. Maybe some will become coaches or TV personalities, but that is likely a small number.