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The Tax Implications of Major League Baseball

 

Income taxes are commonplace throughout the United States and are first set at a federal level, where every individual who resides or works in the United States pays a set percentage based on their income and marital status.[2] However, income taxes are additionally set at the state level and vary significantly.[3] In 2025, California’s highest income tax rate (for married individuals making over $1.4 million combined) was 13.3%, but nine states had no income tax whatsoever.[4] Therefore, state income tax levels affect Major League Baseball (“MLB”), and sports leagues generally, in two important aspects: determining the income tax for deferred payments and influencing which team an athlete may sign with.


Shohei Ohtani and the Tax Benefits of Contract Deferrals


Shohei Ohtani – a free agent at the time and arguably the best athlete in the MLB – signed a ten-year, $700 million contract with the Los Angeles Dodgers on December 9, 2023.[5] However, the financial reality of this deal is much more complex than it seems on its face due to its deferrals structure. Deferred compensation refers to a strategy of moving part of the athlete’s promised compensation to after the athlete’s contract with the team expires.[6]


The effect of Ohtani’s contract on the luxury tax is $46 million a year, rather than $70 million a year, so his contract is presently valued at $460 million (versus $700 million) due to these deferrals.[7] Ohtani agreed to be paid $2 million each year from 2024 to 2033, and then $68 million each year from 2034 to 2043.[8]


From now until 2033, Ohtani will be subject to both California income tax and federal income tax, assuming that Ohtani stays with a California team during that time.[9] Because Ohtani is married, in 2026, he would pay 37% on income over $768,700, if filing jointly with his wife, or income over $384,350, if filing separately.[10] The tax brackets are adjusted, higher or lower, based on inflation each year.[11] And these will likely increase by 2033, as the Tax Cuts and Jobs Act expired in 2025.[12] Due to his status as a legal resident of the United States on a P-1A visit and time spent employed in the United States, Ohtani’s contract deferrals will not benefit him as federal income taxes apply irrespective of where he resides.[13] 


Unlike the federal income tax, deferrals benefit Ohtani in the context of the California state income tax.[14] The 2024-25 income tax rates in California for Ohtani’s salary would require him to pay 12.30% on income over $1,442,628, if filing jointly with his wife, or income over $721,314, if filing separately.[15] California already has the highest income tax, and this is expected to increase.[16] If Ohtani stays with the Dodgers, or joins the Los Angeles Angels, San Francisco Giants, or “Sacramento” Athletics (while they are still located in Sacramento), he will pay both of these taxes on his income – the $2 million salary plus any endorsement deals – until 2033.[17]

However, if Ohtani retires from baseball after the 2033 season, he may join the trend of moving out of California to avoid paying California income taxes on his massively deferred salary.[18] Title 14, Section 114 of the Internal Revenue Code explains that a state, cannot require an individual, to pay state income tax on “retirement income” if they no longer reside in the state.[19] This can include “nonqualified deferred compensation plans,” that are paid at least annually, occur for ten or more years, and are “substantially equal.”[20] If Ohtani has retired from Major League Baseball by 2034 and the deferred payments are considered “retirement income,” he  could potentially qualify for this, because he will be paid $68 million each year from 2034 to 2043 (ten years).[21]


If Ohtani is retired by 2034 and moves to a different state – likely one without a state income tax, i.e., Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming – he and his Certified Public Accountant will argue that the annual $68 million deferred salary is “retirement income,” and thus not applicable under California state income tax.[22] However, California is bound to push back on this as they attempt to require Ohtani to pay state income taxes on his deferred salary.[23] Recently, the California Franchise Tax Board said the following in a statement to Sportico:


“‘[N]onresidents are taxable on California source income. Like other states, California has the power to tax individuals on California source income earned when they are nonresidents. One type of California source income includes wages paid to a nonresident who performed services in California . . . The timing and finding of California source income in contracts involving payments for residuals is likewise a fact-specific determination.”[24]


Assuming Ohtani retires by 2034 and moves to a different state before receiving the deferred payments, we will surely see a fight between Ohtani and California.

 

Corbin Burnes and the Arizona Diamondbacks


Surprisingly, under specific circumstances, taxes will also impact the teams that athletes sign with. Corbin Burnes, one of the best pitchers currently in the MLB, signed a six-year, $210 million deal with the Arizona Diamondbacks, taking less money than expected.[25]

He was specifically concerned with flexibility, in multiple respects.[26] First, two years into the six-year deal, Burnes has an opt out from his contract and can re-enter free agency once again.[27] Second, and critical for our analysis, Arizona’s tax law was more advantageous than in other states and countries he was considering.[28] 


Burnes was also negotiating with the San Francisco Giants and the Toronto Blue Jays.[29] However, when compared to Arizona’s state income tax, which would require Corbin Burnes to pay a flat 2.5% tax on income over $31,500 (if filing jointly with his wife) or over $15,750 (if filing separately),[30] California would require him to pay a 12.30% tax on income over $1,442,628 (filing jointly) or over $721,314 (filing separately).[31] Additionally, if Burnes had joined the Blue Jays, Regulation 105 of the Canadian Income Tax Act would require Burnes to pay a 15% tax on his salary.[32] Although the Diamondbacks offered a smaller contract on its face, it has long-term benefits that ultimately drove Burnes to choose the Diamondbacks over other teams in high tax areas.

 

Potential Long-Term Impacts


Income taxes will have a long-term impact as the trend of accepting deferrals throughout the MLB increases, and athletes begin to pay more attention to these financial implications while in free agency. Deferrals have become common in the MLB, with a growing number of athletes accepting deferrals in their contract to allow their team to be competitive and sign more players.[33] For example, the Dodgers owe $1,064,500,000 in deferred payments to nine players through 2047, and those individuals may implement the same strategy as discussed above.[34] We are likely to see more discussions between retiring athletes and the state they played in as deferrals become more common.


Additionally, we should expect to see more free agency decision-making hinged on income tax levels. This type of decision-making has occurred in other sports leagues already – e.g., the National Hockey League – but may finally integrate itself into the MLB after high-profile decisions like Burnes’s.[35]

 

 

Victoria Pineschi (staff writer) is a 3L at Villanova University Charles Widger School of Law. She graduated from Texas A&M University with a BS in Political Science. Growing up, she played volleyball and was (and still is) a massive San Francisco Giants fan. At any point in time, you could find her watching the San Francisco Giants or the Texas A&M football team, basketball team, baseball team, or volleyball team. Upon graduation, Tory will be working as Assistant Director of Compliance at the University of North Texas.


References:

[1] Photo by Tim Gouw on Unsplash

[2] Who Needs to File a Tax Return (Last accessed Feb. 22, 2026) IRS, https://www.irs.gov/newsroom/who-needs-to-file-a-tax-return.

[3] Andrey Yushkov & Katherine Loughead, State Individual Income Tax Rates and Brackets, 2025 (Last accessed Feb. 22, 2026) Tax Foundation, https://taxfoundation.org/data/all/state/state-income-tax-rates/.

[4] See id. (noting that Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington (only taxed long-term capital gains), and Wyoming do not have income taxes).

[5] Alden Gonzalez, Shohei Ohtani Joining Dodgers on 10-Year, $700M Contract (Last accessed Feb. 11, 2026) ESPN, https://www.espn.com/mlb/story/_/id/39076745/shohei-ohtani-join-dodgers-10-year-700m-deal.

[6] See Logan Reardon, Explaining Shohei Ohtani’s Dodgers Contract, Breaking Down Deferred Money in MLB (Last accessed Apr. 2, 2026) NBC Los Angeles, https://www.nbclosangeles.com/mlb/explaining-shohei-ohtanis-dodgers-contract-breaking-down-deferred-money-in-mlb/3289535/.

[7] See Shohei Ohtani (Last accessed Feb. 11, 2026) Spotrac, https://www.spotrac.com/mlb/player/_/id/24661/shohei-ohtani; Mark Feinsand, Explaining the Unprecedented Deferrals in Ohtani’s Dodgers Deal (Last accessed Feb. 12, 2026) MLB, https://www.mlb.com/news/shohei-ohtani-dodgers-deal-deferrals-explained.

[8] Spotrac, supra note 3.

[9] Michael McCann et al., Ohtani’s $680M Deferment Hits Interest Income to Save on Taxes (Last accessed Feb. 12, 2026) Sportico, https://www.sportico.com/law/analysis/2023/ohtani-interest-free-deferred-money-tax-1234756781/.

[11] Inflation-Adjusted Tax Items by Tax Year (Last accessed Feb. 12, 2026), IRS, https://www.irs.gov/newsroom/inflation-adjusted-tax-items-by-tax-year.

[12] McCann et al., supra note 6.

[13] See Kevin Baxter, Athletes from Foreign Countries in the U.S. Need Visas. Here’s How the Process Works (Last accessed Feb. 12, 2026) Yahoo! Sports, https://sports.yahoo.com/athletes-foreign-countries-u-visas-105023978.html (noting that P-1A visas are temporary employment visas for “athletes who are competing at an ‘internationally recognized level of performance’”)

[14] See McCann et al., supra note 6.

[15] California State Income Tax Brackets and Rates for 2024-2025 (Last accessed Feb. 12, 2026) H&R Block, https://www.hrblock.com/tax-center/filing/states/california-tax-rates/?srsltid=AfmBOoqNv5C7X19R7P0y5qgIneOu0CFqbB0e8MjU5M-H4peocs3qAho-.

[16] See McCann et al., supra note 6.

[17] See id.

[18] See id.

[19] Id.

[20] Id.

[21] See id.

[22] Id.; Stephen Bronner, States with No Income Tax (Last accessed Feb. 12, 2026) Investopedia, https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx.

[23] McCann et al., supra note 6.

[24] Id.

[25] Or Moyal, Why Top MLB Free Agent Corbin Burnes Took Less Money in Arizona (Last accessed Feb. 12, 2026) Front Office Sports, https://frontofficesports.com/why-corbin-burnes-mlbs-best-remaining-free-agent-is-headed-to-arizona/.

[26] See id.

[27] Id.

[28] Id.; Bob Nightengale (@BNightengale), X (Dec. 28, 2024, 1:26 AM), https://x.com/BNightengale/status/1872891913520726260.

[29] See Nightengale, supra note 28.

[30] Individual Income Tax Information (Last accessed Feb. 12, 2026) AZ Department of Revenue, https://azdor.gov/individuals.

[31] H&R Block, supra note 12.

[32] Simplified Regulation 105 Income Tax Waiver Application for Non-Resident Artist and Athletes (Last accessed Feb. 12, 2026) Government of Canada, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/film-media-tax-credits/behind-scenes-personnel/waivers-withholding-tax/regulation-105/simplified-process-non-resident-regulation-105.html (stating “Regulation 105 of the Canadian Income Tax Act requires a payer to withhold 15% of the amount paid for services of an independent nature provided in Canada by a non-resident.”).

[33] See generally MLB Contracts w/ Deferred Money (Last accessed Feb. 22, 2026) Spotrac, https://www.spotrac.com/mlb/contracts/deferred.

[34] See Dodgers’ Deferred Payment Obligations Surpass $1 Billion (Last accessed Feb. 22, 2026) ESPN, https://www.espn.com/mlb/story/_/id/47315355/dodgers-deferred-payment-obligations-surpass-1-billion.

[35] See generally Ali Meyer, Majority of Pro-Hockey Players Choose Teams with Lower Taxes (Last accessed Feb. 12, 2026) The Washington Free Beacon, https://freebeacon.com/issues/majority-of-pro-hockey-players-choose-teams-with-lower-taxes/.


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