Tax advice is just one more thing that the wealthy can afford to spend their extra cash on.

The Los Angeles Dodgers and superstar Shohei Ohtani revealed a mega agreement last month, and regular taxpayers should take note.

The Dodgers signed Shohei Ohtani to a record-breаking 10-year contract worth $700 million. Ohtani is widely considered to be the greatest hitting-pitching combination in baseball since Bаbe Ruth.

However, Ohtani will only receive $2 million per year from the Dodgers for the duration of those ten seasons. The $700 million is being postponed by the Japanese sensation. Between 2034 and 2043, the year Ohtani turns 49, he will get yearly payouts of $68 million.

The pitcher-hitter is likely forfeiting hundreds of milliоns of dollars because he is putting off the majority of his salary without interest. The current worth of the contract is $460 million, as determined by Major League Baseball, due to the large delay.

So, what do regular people who pay taxes need to know?

Distribute your earnings

According to experts, Ohtani is utilizing a fundamental idea of tax savings by delaying income: Diversify your income streams.

“If Ohtani’s contract was solely for his tenure with the Dodgers, he would incur enormous federal and state tax liabilities for several years throughout his tenure with the club,” remarked Colin Day, a certified financial advisor based in St. Louis.

Incomes beyond a certain threshold are subject to the highest rates of federal income taxation. Incomes over $609,350 will be subject to the highest tax rate of 37% in 2024.

The IRS “wants regular folk to evenly receive income throughout their lives, not receive it in large spikes,” as Day put it, and this concept is reflected in the tax agency’s bracketing system.

According to TurboTax’s tax expert and certified public accountant Lisa Greene-Lewis, many middle- and upper-class Americans can save a lot of money by deferring paying taxes on income, “and especially large lump sums.” This is particularly true if the new income could put them in a higher tax bracket.

Put a low-tax state on your retirement radar.

It is widely believed by experts that Ohtani delayed spending his Dodger funds in order to evade the high state taxes in California.

With a maximum rate of 13.3% for high earnings in 2023, California has one of the nation’s most expensive state tax systems. The Tax Foundation reports that no other state’s maximum tax rate is greater. As of this year, the highest rate in California is 14.4%.

If Ohtani were to make $700 million in California over the following decade, he would be subject to a state tax rate of 14.4%, which would meаn that he would give up almost $10 million per year.

However, Ohtani’s substantial salaries will not be activated until 2034, the year in which he would turn 40. When that happens, he’ll be able to retire to Florida, a state without a sales tax.

The most important thing to take away from Ohtani’s contract is the fact that there can be a significant disparity in tax dollars if you can make your money in a state with a high income tax but receive it in a state with a lower income tax. St. Louis-based certified financial advisor David Foster estimated that Ohtani might be out tens of milliоns of dollars.

Does it pique your interest? It should! In addition to Wyoming, Texas, and Nevada, a number of other states do not impose any kind of state income tax.

The importance of interest

Ohtani, as previously said, consented to postpone $680 million in pay for a period of ten years, forfeiting any interest that may have accrued.

The sports business website Sportico calculated that, assuming a 5% yearly interest rate, Ohtani would be foregoing $18.55 million per year and $185.5 million over a decade if he waives interest.

The money might have been invested and made enough to stay up with inflation, according to Andrew Herzog, a certified financial advisor from Plano, Texas.

Because of the decline in the value of deferred compensation, Major League Baseball has reduced the annual value of Shohei Ohtani’s contract from $70 million to around $46 million for tax reasons.

“The $700 million contract is what grabs headlines, but Ohtani should actually care more about the net present value of the deal instead,” said Jake Smail, a certified financial advisor in Aurora, Ohio.

The dangers of deferred income

In the near future, the Dodgers will not declare bankruptcy. But experts аrgue that businesses come and go, so no one should put too much stock in a company that might not be around for ten or twenty years if they defer revenue from them.

The only way to make deferred income a reality, according to Herzog, is if the employer remаins around for a couple decades. Ohtani and the Dodgers “shouldn’t be a problem” due to possible insolvency, he quickly adds.

Ultimately, Herzog emphasized that one must strike a balance between being fully present in the here and now and making predictions about what the future holds.

The St. Louis advisor Foster compares Ohtani to IT employees in Silicon Valley, who may be eligible for a deferred compensation plan offered by their employers.

While Foster acknowledged that the Los Angeles Dodgers posed less of a threаt, he cautioned that many Bay Area tech companies may be in jeopardy if their employers were to go bankrupt and fail to pay deferred compensation.

Everyone dreads tax time.Before you file your taxes in 2024, make sure you read this.

An ideal dilemma

In the grand scheme of things, the tax situation that Shohei Ohtani and the Dodgers are in should be considered fortunate for the majority of us.

Most of us don’t make nearly that much money, so we probably won’t owe milliоns in possible income taxes. In 2022, the median household income was $74,580, as reported by the Census. We can’t afford to put any of it off, because most of us don’t make enough money.