The International Athlete and Entertainer: A Summary of Important U.S. Tax Considerations

Many famous athletes and entertainers from outside the U.S., like Justin Bieber, Manu Ginobili, Roger Federer, and Shakira, earn a lot of money in the U.S. They face special tax issues because of their income and travel. It’s important for them to plan for taxes from the start of their careers, as it can save them a lot of money. If you’re an athlete or entertainer who is not a U.S. citizen or resident, you will only have to pay U.S. federal income tax on certain types of income from the U.S. This includes money earned from working in the U.S. or prize money from U.S. events. You won’t have to pay tax on money earned from endorsements or events outside the U.S. The amount of tax you have to pay depends on the type of income and whether there is a tax treaty between the U.S. and your home country. When athletes sign endorsement deals, they get paid for doing things like testing products and appearing at events (services) and for letting the company use their name and image in ads (royalties). The amount of U.S. tax they have to pay on these payments can vary, but if they qualify for a U.S. income tax treaty, they might not have to pay as much tax. To qualify, they have to meet certain residency and benefits tests. If they do qualify, they can pay less tax on the money they earn from the endorsement deal. The U.S.-Netherlands Income Tax Treaty has rules about how athletes and entertainers are taxed. If you are a resident of the Netherlands and earn money from your personal activities in the U.S., you might only have to pay taxes in the Netherlands. But if you have a fixed base in the U.S., you might have to pay some taxes there too. If you’re an athlete or entertainer, there are special rules that might apply to you, and you might have to pay taxes in the U.S. for money you earn from your activities as an athlete or entertainer there. The main thing to consider is whether the income is mostly from the job itself or from other activities or rights. For example, prize money from a tennis tournament is considered income from playing tennis and is taxed under a certain article. But if the income is not directly from playing tennis, it’s taxed under a different article. For endorsement deals, the income can fall under different categories, and the value of each category can be determined by looking at similar contracts. This matters because it affects whether nonresident athletes are taxed in the U.S. and if sponsors need to withhold taxes. In cases involving golfers Goosen and Garcia, there were disputes with the IRS about the type of income and how it should be taxed. The IRS and professional golfers disagreed on how to categorize the money they made from endorsement deals. The Tax Court ruled that one golfer’s endorsement income was partly U.S. income and he had to pay taxes on it. Another golfer agreed that most of his endorsement money was for the right to use his name and image, and only a small part was for personal services. The Tax Court said that Garcia’s endorsement payments from TaylorMade should be split up with 65% going to the use of his image for marketing and 35% for personal services. They compared Garcia to another golfer, Goosen, and decided that Garcia’s status as TaylorMade’s main icon meant he deserved more money for the use of his image. Since Garcia didn’t have to do as many personal appearances as Goosen, the court said his endorsement deal was more focused on using his image, rather than personal services. The Tax Court ruled that golfer Sergio Garcia’s endorsement income from TaylorMade was not subject to U.S. federal income tax because it was considered royalty income under the U.S.-Swiss Tax Treaty. This means that the income was only taxable in Switzerland, where Garcia is a resident. If athletes or entertainers become U.S. income tax residents, they may face different tax implications, so they should consider the benefits and consequences before making that decision. The substantial presence test determines if someone is a U.S. tax resident based on how many days they’ve been in the U.S. If they meet the test, they might still be able to be treated as a nonresident if they have stronger ties to a foreign country. There’s also a rule in some tax treaties that can override the substantial presence test. If you’re planning to move to the U.S., it’s a good idea to think about how it might affect your taxes. When a nonresident alien becomes a U.S. tax resident or citizen, they may have to pay taxes on the increased value of their assets. To minimize this, they can do things like increase the value of their assets before becoming a U.S. taxpayer, and try to receive income and pay expenses before their tax status changes. Before moving to the U.S., it’s important to understand how your taxes could be affected. If you become a U.S. citizen or are considered a U.S. domiciliary, you’ll have to pay U.S. federal estate and gift tax on all of your worldwide assets. This could be a lot of money, as the maximum rate is 40%. Non-U.S. domiciliaries only have to pay this tax on certain U.S. assets. To avoid paying these high taxes, it’s best to make gifts or transfer assets into trusts before becoming a U.S. citizen or domiciliary. This way, the gifts won’t be subject to the U.S. federal gift tax. Remember, it’s a good idea to get legal help with this process. If an athlete or entertainer from another country wants to live and work in the U.S., they need to understand the tax implications. If they decide to go back to their home country after getting U.S. citizenship or a green card, they might have to pay an exit tax. This tax applies if they had U.S. citizenship or a green card for at least 8 of the last 15 years and meet certain financial criteria. It’s important for athletes and entertainers to plan for U.S. taxes early in their careers and get advice from a qualified professional. If they don’t, they could end up with big tax bills. And if they decide to become U.S. tax residents, they need to understand the tax consequences, even if it’s just for a short time. In short, get expert advice and plan ahead to avoid tax issues later on. If you earn money from things like interest, dividends, and salaries in the U.S., you may have to pay a 30 percent tax on that income. However, if you’re from the Netherlands, there’s a special agreement between the U.S. and the Netherlands that might change how much tax you owe. Also, if you’re not a U.S. citizen, you usually don’t have to pay tax on any money you make from selling stocks or property, unless you’ve been in the U.S. for more than 183 days in a year. But the rules for counting those days are a bit complicated, so it’s best to consult a tax professional to make sure you’re doing things right. If someone is considered a resident of both the U.S. and another country, there are rules to determine which one they are a resident of for tax purposes. Generally, it depends on where they have a permanent home, where their personal and economic ties are stronger, where they spend most of their time, and where they are a citizen. For estate and gift tax purposes, a U.S. domiciliary is someone who lives in the U.S. and intends to stay there indefinitely. There are special taxes for transferring money or property to grandchildren, and these taxes can also apply to non-U.S. residents, with some exemptions available. If a person with a green card gives up their status and meets certain financial criteria, they may have to pay an exit tax. This information comes from the Tax Law Section.

Source: https://www.floridabar.org/the-florida-bar-journal/the-international-athlete-and-entertainer-a-summary-of-important-u-s-tax-considerations/