Like many of you I watched the NFC and AFC Championship games on Sunday. However, I try to keep abreast of what’s going on in the world of golf as well. In looking over the weekend’s golfing news I saw an interesting article about Phil Mickelson’s future plans. Evidently he is considering “drastic changes” to his career because of taxes.
According to Phil, his marginal tax rate on earned income is 62% or 63% and in light of this he needs to make some decisions about his career going forward. To most of us paying a marginal tax rate of 62% seems astronomical. How did Phil come up with those numbers?
First there are federal income taxes. With the new tax law just passed at the beginning of 2013 the top marginal rate is now 39.6%. This rate kicks in after $450,000 of taxable income (for joint filers). Then there are California income taxes of 13.3% that were also just enacted recently. Above this is the 1.45% Medicare employee tax and the 1.45% Medicare employer tax, which Mickelson must also pay because he is self-employed. Then there is the 0.9% Medicare tax for those earning more than $200,000. This adds up to a marginal tax rate of 56.7%.
The numbers do not quite add up to 62% but they are still quite high. Mickelson may be considering that he must pay both sides of the Social Security tax, which is 12.4% of the first $113,700 in income. While this is not a very significant amount in his world, Mickelson does live in San Diego where sales taxes are 8%. There is also the new 3.9% Medicare tax on investment income. There is little doubt that Mickelson will definitely pay more than his fair share of taxes.
Most of us can’t understand the tax problems of multimillionaires. So let’s bring it down to something that everyone can understand. Let’s suppose that someone offers you $100 to do a small job for them. You complete the job and instead of the person handing you a nice crisp $100 bill instead they give you two crumpled up $20s and the government gets the other three $20s. Yes you have $40, which is more than you had before, but something inside of you rebels at the fact that the government gets 60% of that every single time. How long will it be before you decide that you don’t really want to work like that anymore? It would seem that Phil Mickelson is reaching that point and I would dare say that he is not alone.
How will Phil Mickelson reduce his tax bill? He could begin by moving to a state with no state income taxes such as Florida. There is a reason that many professional golfers, including Tiger Woods, live in the state of Florida. He might also just decide to earn less money. He could scale back his schedule or simply go into early retirement. Personally I would hate to see that happen because Phil Mickelson is good for golf.
Golf is a game that can be enjoyed for a lifetime and many of us will play until we can no longer swing a club. At the professional level, golf can also provide the opportunity to earn income well past the point where other professional athletes have retired. I hope that Mickelson can come up with a solution that works for him and I hope to see him compete for several more years.
Dwight is an avid golfer.