The following post is written by our current intern, Calvin Nastyn. He is a student at the University of Hartford where he is studying finance. The issue that Calvin digs into is a wonderful (and comical) example of an odd implication associated with state taxation laws.
Benjamin Franklin once said in a 1789 letter that “nothing can be said to be certain except death and taxes.” We are taxed in every aspect of our life. Whether it’s going to the store to buy groceries or even working to make a living, taxes are always going to follow no matter what. With 2017 being the year of tax reform, it is without a doubt that taxes are a complex subject. Those who have filed taxes know that there are hundreds, if not, thousands of different facets and nuances that our federal, state, and local taxes mandate. Anything that has to do with money has its own little (or big) section in the tax code.
Football player Jimmy Garappolo can attest to the fact that taxes are complicated, even though they may have worked in his favor. Long story short: Jimmy Garappolo, a former Patriots quarterback, will end up earning more than Tom Brady from the Super Bowl. Because pay for the Super Bowl extends to former players who played at least 8 games during the season of the Super Bowl, Garappolo will reap earnings from the biggest game of the season in which he and the team he is currently part of is not on the field. But how will he make more than Tom Brady, arguably the best quarterback in history? Minnesota law states that any professional athlete who is a non-resident of the state must pay taxes of his earnings from the team that year multiplied by a fraction that equals (total duty days worked in Minnesota/total days worked in the season). Since Garappolo has no duty days in Minnesota, he would have an effective tax rate of 0% in Minnesota. Rather, he would just be subject to the tax in the state where he lives, which is most likely taxed at a lower rate, given that Minnesota has the 2nd highest income tax rate, following California at number 1.
The point is that there are times where taxes can sometimes work in your favor or sometimes against it. Investors, in particular, are never certain about what may happen in the markets. They can only control risk. But when its time to cash out, there can be many costly tax implications that can severely hinder gains. You can be the best investor in the world, as Tom Brady is the best quarterback. However, if you don’t know your way around taxes that come along with investing, you can end up earning less than the guy who worked a fraction of what you did.