Skip to main content

Reply to "2020 High School players signing as Undrafted Free Agents"

@roothog66 posted:

It's just income like any other income. Keep in mind, though that some of that will be deductible or provide credits. It's not like scholarship money. It's like they gave you x amount as additional income and then you spent it on school. You can use the American Opportunity Tax Credit to get your first $2000 back as a tax credit and 25% of the next $2,000 for an additional tax credit. That's not a deduction off your taxable income, but cold hard cash. So, let's look at out $200K earner and say he gets an extra $30k for school. His taxable income jumps to $217,800. The taxes on that extra $30k would be 32% on the first $19,550 ($6,256) and 35% on the remaining $10,450 ($3,657.50).

So the extra school money cost him $9,913.50 in extra taxes minus $2,500 for the tax credit. That's an additional tax bill of $7,413.50 or $24.7%. Of course, that's for a guy making $200k IN THE YEAR IN WHICH HE GOES BACK TO SCHOOL.

The most likely scenario is the guy isn't getting that money in a year where he's still pulling down $200K for playing baseball. Instead, let's say he takes some other work and pulls in $25,000 for the year plus goes back to school.

$25K + $30K for school is $55K for the year. 

He gets his $12,400 single payer deduction (we're assuming ZERO other deductions). So, his taxable income is $42,600.

The first $9,875 at 10% ($897.50)

The next $30,250 at 12% ($3,630) and 

The remaining $2,475 at 22% ($544.50)

Total tax: $5,072

Gets back a $2,500 credit

Tax bill: $2,572

That's an effective tax rate of 4.7%

Wow. Bottom line is you don't want to use those credits in the same tax year in which you're getting a big paycheck from the club. A guy getting a $200k check right now who wants to use that money THIS fall is making a huge financial mistake.

 

You CAN'T use the credit in big income years.  The income limit for the American Opportunity Tax Credit is $80,000 modified adjusted gross income.  (Double that if married.)  It isn't for everyone, unfortunately.

×
×
×
×