In recent years, fines imposed by various professional sports teams and organizations on professional athletes have become commonplace. But what are the tax implications of these fines paid by players? Professional athletes may be able to claim these fines on their Schedule A as a miscellaneous deduction for unreimbursed employee expenses subject to the 2% adjusted gross income (AGI) floor.
According to Internal Revenue Code (IRC) §162, a miscellaneous deduction is allowed for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The two key words in that statement are “ordinary and necessary”. A professional athlete is in the business of playing sports and by not paying a fine levied upon them by the governing organization of their sport or their employer, they would no longer be able to continue in their profession. Therefore, these fines may be considered necessary in their profession. As stated before, the fines levied by these organizations have become common in the industry and would satisfy the “ordinary” requirement of the expense.
One might argue that per IRC §162(f) no deduction is allowed for fines or penalties paid by a taxpayer. However, IRC §162(f) only applies to fines and penalties paid to a government, which professional sports organizations and teams obviously are not.
The actual tax benefit of this possible miscellaneous deduction will vary depending on the taxpayer’s circumstances. The first hurdle to gaining benefit from this deduction is the 2% AGI floor. With most professional athletes 2% of their AGI is predictably high, however, due to the fees paid to an agent and other unreimbursed business expenses (i.e. various offseason training expenses) they would most likely surpass the floor.
The Alternative Minimum Tax (AMT) can also affect the tax benefit received by deducting the fines. Miscellaneous itemized deductions are added back to their adjusted gross income when calculating AMT. This means that if the taxpayer is subject to AMT, the tax benefit from the fine will be reduced or completely eliminated.
Professional athletes have found themselves subject to an increasing amount of fines, but they may be able to gain a tax benefit from such fines by deducting them on Schedule A. A player may not be happy about paying a fine, but this simple tax break may lessen the sting.
As individual circumstances may vary, you should always consult your tax advisor for further information.