This week was fantastic for the world of sports and one that will rewrite the history books for the Professional Golf Association.
Phil Mickelson won this seasons second major on Sunday after he out dueled Brooks Koepka and Louis Oosthuzein to win the PGA Championship by 2 strokes. At the age of 50, Phil is the oldest golfer ever to win a major. Phil now has 6 major championship titles dating back to 2004.
I'm an avid golf fan and I've enjoyed watching Phil over the years. He has spent the majority of his prime years playing in the shadow of arguably the best golfer of all time, Tiger Woods. Tiger's recent battles with injury and off the course problems has opened the door for other competitors in recent PGA seasons.
Although Phil hasn't been nearly as dominant as Tiger, he's managed to stay on the course and he's continued to compete each year. He's worked hard on his swing, body, and mental health which has allowed him to keep up with the young guns that are dominating modern day golf tournaments.
His career longevity was perfectly on display however this weekend as he outlasted the field all weekend on the Ocean Course at Kiawah Island. His 366 yard drive on the 16th hole on Sunday was the longest of the week for the entire field! Incredible stuff.
The total purse at the PGA Championship this weekend was $12,000,000. Phil's portion of the winnings was $2,160,000. I guess I should have chosen another career path...
In honor of this great win, I thought it might be fun to speculate how much tax money he'll owe on his massive winners check. Phil in case you're reading this, I'll include some tax reduction strategies that you may want to consider.
Federal Income Tax
With the win at the PGA Championship, Phil automatically enters into the highest federal tax bracket of 37%. Assuming he and Amy file a joint tax return, Phil will owe $736,349 of his check to the federal government.
You'll notice that 37% of $2,160,000 is actually $799,200. So why is his tax bill a little less than this?
The federal tax brackets are "progressive". This means that you don't see where your income falls on the bracket and apply the corresponding tax rate. Instead, apply the tax rate against each level of your income while you work your way up the tax bracket chart.
For example, the first $19,750 of his winnings are taxed at 10%, the next $60,499 are taxed at 12%, and so on.
Tax Tracker: $736,349
State Income Tax
Along with his Federal income tax return, Phil will need to file s state income tax return with South Carolina since he earned the income while playing at Kiawah Island, which is located in the state of SC.
Tax payers are required to file state income tax returns in all states in which they earned income. So far in 2021, Phil has earned prize money for tournaments held in Florida, Texas, Georgia, California, and North Carolina.
Since Florida and Texas don't have state income tax, Phil will need to file state income tax returns in GA, CA, SC, and NC.
I did a (very) quick estimation and it seems like Phil will owe additional state income taxes in the amount of $25,000.
Phil's was born in Santa Fe, California which had been his primary residence up until last year when he moved to golf haven Jupiter, FL.
That was a smart tax move for Phil and Amy that will amount to an approximate tax savings of approximately $234,778. They were paying CA state income tax at a marginal rate of 12.3%, but are now reaping the rewards of Florida's zero income tax.
Tax Tracker: $761,349
Self Employment Tax
PGA tour professionals are contractors of the Professional Golf Association. In a nutshell this means that they are self employed business owners and are required to provide their own benefits, pay their own taxes, track their business expenses, and even hire their Owen employees.
Assuming Phil's golf business is a sole proprietorship (terrible assumption and this is definitely not the case), Phil will owe self employment tax in the amount of approximately $62,640.
A sole proprietorship is the most basic form of business that can exist for an individual business owner. Other forms of business ownership include LLC's, C-Corporations, S-Corporations, and Partnerships.
Each business entity comes with different levels of personal liability protection, costs, ownership flexibility, and you guessed: tax implications.
Tax Tracker: $823,989
So after calculating an approximate tax liability of $823,989, Phil will take home about $1.3 million of his nearly $2.2 million PGA winners check.
Yikes. Let's take a look at some tax reductions strategies Phil may want to consider.
Claim all Business Deductions
As a for-profit PGA tour golfer, Phil can deduct pretty much any expense that he incurs related to his golf game. As long as the IRS deems the expense to be necessary and reasonable for earning income playing golf, Phil can expense it.
I know wouldn't it be nice to deduct that new Sim Driver and set of Mizuno irons?
Here is a quick (also incomplete and grossly inaccurate) list of some things that might be eligible for a business deduction during the PGA Championship weekend:
Air Travel: $20,000
Lodging: $20,000
Amy's Payroll Expense: $10,000
Agent Payroll Expense: $8,000
Swing Coach: $10,000
Updated Clubs: $4,000
Caddie (brother Tim) Bonus: $100,000
Callaway Chrome Soft: $50
Total Deductions: $172,050
Phil can quickly knock off $172,050 from his $2,160,000 check, tentatively reducing his tax bill to...
Tax Tracker: $699,968
Retirement Plan Funding
Max out retirement plans for himself, Amy, and other employees. Every dollar saved into a pre tax retirement account will reduce Phil's tax liability dollar for dollar.
This is an area where Phil and his advisors can get creative. Everything from SEP IRA's, solo 401k's, and special deferred compensation pension plans are a few of the options that might be on the table.
Let's say he maxes out his plan, Amy's plan, and brother Tim's plan: $150,000 deduction.
Tax Tracker: $488,233
Incorporate the Golf Business
As I suggested earlier, it's highly unlikely that Phil is operating his golf empire under a simple sole proprietorship. So he's probably already taken steps to setting up some type of LLC or corporation.
I don't want to get into the thick of the tax benefits of incorporating because on the of chance you're still reading, I'll lose you now. In a nutshell, individual taxpayers like Phil can choose to leave money in their business or take money out of their business depending on certain circumstances. On the other hand, income earned in any sole proprietorship must "flow through" to the individual tax payer/business owner.
As with anything this comes with some restrictions... but I'll leave it here.
Another ancillary benefits of incorporating include personal asset protection which is critical for someone of Phil's social standing and wealth.
Let's say incorporating knocks off another $100,000 tax liability.
Tax Tracker: $451,233
Standard Deduction vs Itemized Deductions
Given Phil's massive wealth, he will undoubtedly be itemizing his expenses this year as he most likely has done ever since he began golfing on the PGA tour.
On the other hand, itemizing your deductions allows a taxpayer to deduct things like mortgage interest, mortgage insurance, property taxes, state and local income taxes, and charitable donations.
If total itemized deductions is greater than the standard deductions, tax payers "itemize" one their tax return.
So let's make the reasonable assumption that someone with Phil's wealth and estate will itemize their deductions, and for this week he's able to knock off about $125,000 in deductions.
Tax Tracker: $326,233
Increase Donations
In 2004, the Mickelson's established the Phil and Amy Mickelson Foundation that is primarily focused on providing support to a variety of youth and family initiatives.
I'm sure Phil donates are large chunk of every tournament check to his foundation and other 501(c)(3) organizations. But with Sunday's win, Phil could be on his way to a massive earnings season. It's very possible that he'll have one of his highest earnings seasons since 2013 when he won the Open Championship at Murfield and took home about $5.5 million.
Cutting a large check to his private foundation (let's say $250,000) would go along way to increase his itemized deductions and reduce his tax bill in 2021.
Tax Tracker: $76,233
Pretty cool isn't it? With some very basic tax planning Phil cut could potentially cut his tax bill down from over $800,000 down to about $76,000.
I recently read something that said in 2016 Phil Mickelson made over $37 million after all his endorsements, speaking engagements, golf, and investments. So his actual tax situation is obviously more complicated than this, but I thought it would be interesting to show you an example of how our tax system works-- and how planning makes a big difference.
Although possibly on a much smaller scale this type of planning can apply to middle class America. If you own a business, everything discussed in this post applies to you!