The signing bonus sourced correctly

Transforming challenges into opportunities

Mitigation is not a product you buy after the money arrives. It is a decision made while the terms are still being drafted. This case turns on a distinction most states publish in their own regulations and most advisors apply too late to use.

Challenge

A veteran professional athlete was negotiating a four year contract: $28 million in salary and a $12 million signing bonus. His team plays in a state with a top individual rate above 10 percent. He had recently established residence in a state with no income tax.

• Everything apportioned by duty day. His prior advisor allocated all compensation across the states he played in, using duty days. Applied to salary that is correct. Applied to the bonus it gave away a number that did not have to be given away.
• The contract not yet read for tax. The agent had negotiated the money. Nobody had read the bonus clause for the three features that decide how it is sourced, and once signed those features cannot be added.
• Residence asserted, not documented. He had moved, but the file held nothing that would survive a residency audit from the state he left.
• No plan for the years after. Four years of concentrated income and a career that ends long before retirement does.

Strategic response

The planning cycle in our system runs in a fixed order: position review, strategy identification, modeling, authority documentation, client decision, implementation, carry through to the return. It was run before signature rather than after.

• The bonus tested against the three prongs. States that address this treat a signing bonus as not apportionable where it is paid separately from salary, is not refundable, and is not conditioned on the player performing services. The draft satisfied two of the three.
• One clause renegotiated. The bonus was separated from the salary schedule and the refund trigger removed, so all three conditions were met on the face of the contract rather than by argument afterward.
• Authorities recorded at the time. The state regulations and rulings relied on were documented the week the position was taken, not eighteen months later when a notice would arrive. A position reconstructed after the fact reads like a reconstruction to everyone who sees it.
• Residency made real and evidenced. Domicile established before the payment date, with the ordinary proof a state actually asks for: days, home, licenses, registrations, banking, professional and personal ties.
• Duty days recorded contemporaneously. So the salary apportionment, which is genuinely apportionable, is defensible on its own terms.
• A defined benefit plan funded. Sized to his income and his age, because the career is short and the deduction buys an asset he keeps.

Result

Nothing was purchased, nothing was borrowed, and no deduction exceeded a dollar he actually spent.

• $1,290,000 of state tax not incurred. The $12 million bonus sourced to his state of residence rather than apportioned. At the team state’s top rate that is the difference between zero and roughly $1.29 million.
• $280,000 contributed and deducted. To the defined benefit plan in year one, reducing federal tax by roughly $104,000 while the balance remains his.
• Salary apportioned defensibly. With a contemporaneous duty day record, so the part that is apportionable is supported rather than estimated.
• The position documented to standard. Authorities recorded when the position was taken, and no disclosure required, because the position was not a shelter and did not need one.

Conclusion

The entire saving came from reading a contract before it was signed and from a move he had already made. There was no program, no institutional loan, and no deduction larger than the cash that left his account. This is what mitigation looks like when it is done at the only moment it can be done.