Multistate Tax Quandary

Phil Mickelson's $7 million house in San Diego.

Last Sunday golfer Phil Mickelson committed the sports version of the Kinsley political gaffe ("A gaffe is when a politician tells the truth - some obvious truth he isn't supposed to say.") Phil Mickelson, a resident San Diegan, commented on the Federal and California tax hikes that are hitting high-income residents:

“I’m not exactly sure what I’m going to do yet,” said Mickelson, who tied for 37th at PGA West. “I’m not going to jump the gun, but there’s going to be some drastic changes for me, because I happen to be in that (tax) zone that has been targeted federally and by the state. It doesn’t work for me right now, so I’m going to have to make some changes.” [snip]

“I’ll probably go into it more next week,” he added, “but if you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate is at 62 to 63 percent. So I’ve got to make some decisions on what I’m going to do.”

Obviously, Phil has to be considering a move to a no-tax state like Florida, emulating Tiger Woods, Michelle Wie, and Venus and Serena Williams. It seems that one of the few remaining social taboos is for rich people to complain about their taxes, so it's not surprising that Phil stopped digging a deeper hole and promised no longer to talk about the subject.

Nevertheless, I'd like to add another word of sympathy, but for a problem that has received much less publicity than high tax rates: tax complexity at the state level. Professional golfers must pay taxes in each state where they win; a busy golfer must file dozens of tax returns, allocating winnings and expenses to each state. The states try to be "fair" by trying not to double-tax income, but somehow state tax boards always seem to decide gray areas in their own favor.

The real bonanza for high-tax states lies in being designated the state of residence, which gets assigned the intangible income (interest, dividends, royalties, etc.). A veteran superstar like Phil Mickelson or Tiger Woods has endorsement and investment income that greatly exceeds his annual golf winnings.

If Phil moves to Florida, say, but leaves a condo in California to visit his kids who may wish to finish school there, you can bet that California will ask for an accounting of days spent in Florida versus days spent in California and contest the domicile change. (For a good overview, see Hodgson Russ' article "The Multistate Tax Quandary for Professional Athletes".)

Phil Mickelson appears to be a good, successful family man who gives something back through charitable works but is spending more and more time worrying about the problems of wealth, which he can't talk about. No, we don't feel sorry for him, but we do sympathize. © 2013 Stephen Yuen