Exploring Shohei Ohtani's Dodgers Deal and California Tax Exemption

Exploring the Financial Nuances of Ohtani's Innovative MLB Deal

by Nouman Rasool
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Exploring Shohei Ohtani's Dodgers Deal and California Tax Exemption
© Jayne Kamin-Oncea/Getty Images

Shohei Ohtani's unprecedented $700 million contract with the Los Angeles Dodgers has become a focal point in the world of sports, sparking widespread curiosity and debate. The crux of the intrigue lies in the unique structure of this historic Major League Baseball (MLB) deal, particularly regarding the tax implications of Ohtani's earnings.

Under the terms of this groundbreaking contract, Ohtani is set to receive $70 million annually in average value. However, in a strategic twist, he's deferring $68 million of this for each year over a decade, essentially earning $2 million per year in the immediate ten years.

Following this period, he will then receive $68 million annually for the next ten years. This arrangement raises significant questions about Ohtani's tax liabilities, especially considering California's tax laws. In California, tax obligations hinge on residency status.

For the duration of his time with the Dodgers, Ohtani is subject to California state tax on his earnings. However, the situation becomes more complex with his deferred payments.

Tax Implications on Deferred Earnings

If Ohtani relocates outside California or leaves the Dodgers by the time he starts receiving his deferred payments, he could potentially avoid California state taxes on those amounts.

According to wealthenhancement.com, deferred compensation isn't considered taxable income until it is received. This means Ohtani's tax obligations for these payments would depend on his residency and employment status at that future date.

For context, had Ohtani been earning a straight $70 million per year, his tax breakdown would be substantial. Estimates from smartasset.com suggest that at this rate, he would face $25.9 million in federal taxes and $4.65 million in California taxes.

Additional deductions like agent fees, jock tax (tax paid in states where income is earned), and Medicare would further reduce his net income. Currently, on his $2 million annual salary from the Dodgers, Ohtani's tax rate stands at 46.54%.

This encompasses federal and California state taxes, as well as FICA and State Insurance Taxes. Post-tax, this leaves him with a little over $1 million annually. Ohtani's endorsement earnings, projected to rise between $35 million to $50 million annually, have likely influenced his comfort with this deferral arrangement.

When the deferred payments commence, if Ohtani remains in California or with the Dodgers, he will face significant tax obligations. According to Nerdwallet.com, the top California tax rate is 12.3%, while the federal cap is 37%.

Over the ten years of deferred payments, Ohtani's combined tax liability could reach a staggering $335.24 million, with California taxes alone accounting for $86.34 million. This deferred payment plan, reportedly Ohtani's idea to aid in roster building, adds a fascinating layer to his financial journey in MLB.

As Ohtani's career progresses, the implications of this innovative contract structure on his taxation will be a subject of keen interest and analysis, highlighting the intricate interplay of sports contracts and fiscal strategy.

Shohei Ohtani Dodgers
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