Shohei Ohtani, previously of the Los Angeles Angels, pitches throughout a sport in Anaheim, California, on July 6, 2021.
Daniel Shirey | Major League Baseball | Getty Images
Shohei Ohtani made historical past this week with a 10-year, $700 million contract to play for Major League Baseball’s Los Angeles Dodgers. The deal’s unique payout structure, nevertheless, may carry some dangers, financial specialists say.
The Japanese famous person will obtain $2 million per yr over the 10-year settlement, which defers $68 million yearly.
Ohtani is not the primary MLB participant to defer revenue. Players akin to (*10*) and Ken Griffey Jr. additionally chose yearly payments. In Bonilla’s case, these got here with a assured 8% rate of interest. But Ohtani will obtain the majority of his contract, $680 million in funds, between 2034 and 2043, with out curiosity.
More from Personal Finance:
Here’s where deflation was in November 2023 — in one chart
What the restart of student loan payments means for your taxes
Here are 3 money tips every high school student should know
The deal may present tax advantages for Ohtani if he leaves California earlier than receiving his deferred revenue, in line with licensed financial planner Eric Bronnenkant, head of tax at Betterment.
For 2024, California’s high tax price climbs to 14.4%, which features a 1.1% payroll tax on all revenue. Bronnenkant stated federal law protects nonresidents from taxes on “retirement revenue,” together with funds structured for no less than 10 years.
But California would possibly disagree, he added.
Ohtani may face increased federal tax charges on the deferred funds, stated CFP and enrolled agent Louis Barajas, who can also be CEO of International Private Wealth Advisors in Irvine, California. He is a member of CNBC’s Financial Advisor Council.
Without modifications from Congress, the very best federal revenue tax price will revert to 39.6% in 2026 from the present high price of 37%. By accepting funds later, “he is taking a danger,” Barajas stated.
The alternative prices of deferred revenue
Another draw back of deferring revenue is Ohtani can not spend or make investments $68 million per yr over the subsequent decade.
“A greenback right now is value greater than a greenback tomorrow,” Barajas stated.
By deferring funds with out curiosity, Ohtani additionally faces decreased buying energy. While inflation has dropped significantly since June 2022, it is troublesome to foretell charges over the subsequent decade.
But if increased inflation returns, “the web worth of his contract is not value as a lot as he thought,” Barajas stated.
The high danger of deferred compensation
While increased taxes and inflation could possibly be points for deferred revenue, the No. 1 concern is the corporate’s skill to pay, specialists say.
That’s vital for Ohtani’s potential tax advantages. To delay taxes on $680 million of deferred compensation, his future revenue should be “in danger,” per IRS pointers, Bronnenkant stated.
However, since he is working for the Los Angeles Dodgers, “the chances of that taking place are slim to none,” Barajas stated.
Don’t miss these tales from CNBC PRO: