Budget & Tax

Baseball star’s contract could save him a fortune in taxes

December 14, 2023

Curtis Shelton

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury,” Judge Learned Hand wrote in 1934.

Shohei Ohtani seems to agree. Ohtani, who has been the most unique player in Major League Baseball since he arrived in Los Angeles in 2018 to play for the Angels, recently signed with the Dodgers and now has the MLB’s most unique contract as well.

Ohtani signed for a record $700 million over 10 years. Instead of taking an annual salary of $70 million, however, Ohtani and the Dodgers agreed to defer all but $2 million of his salary annually for the next 10 years. The other $680 million would be paid out in 10 installments after the initial 10 years of the contract.

Most of the discussion has been about what this means for the Dodgers and their salary cap and luxury tax bills, but it also changes the tax burden for Ohtani himself.

If there were no deferrals and he was to make an even $70 million a year, his annual tax bill would be $35.1 million thanks to California’s top income tax rate of 13.3 percent and the federal rate of 37 percent. That would be $351.4 million in taxes paid over the ten-year lifetime of the contract.

By deferring $68 million, he reduces his annual tax burden to $937,000—or $9.4 million over 10 years. How much he owes in taxes on the deferred payments would depend on where he lives at the time, but it’s possible that by moving to a no-income-tax state Ohtani could eliminate the state portion of his tax bill.

If that was the case, Ohtani’s total tax bill could be estimated at $260.5 million over 20 years when considering state and federal income taxes. That’s 35 percent less than what he would owe if he chose not to defer any of his salary despite the time frame being twice as long.