The Boston Red Sox are reportedly interested in signing several of their rising stars to contract extensions in which the players would forgo arbitration and free agent years in exchange for more money early in their careers.
The use of deferral money over a period lasting at least a decade could play a key role in those transactions, especially given the interplay between federal and Massachusetts tax laws.
Last year the Red Sox signed outfielder Ceddanne Rafaela (eight years, $50 million) and pitcher Brayan Bello (six years, $55 million) to extensions before those players were eligible for arbitration. The team could reach similar deals with other promising young players, including first baseman Triston Casas, outfielder Wilyer Abreu, outfielder Roman Anthony, second baseman Kristian Campbell and shortstop Marcelo Mayer. The Red Sox could also reach a deal with new ace Garrett Crochet, who was acquired over the offseason from the Chicago White Sox and who recently told The Boston Globe he would put contract talks on hold once the regular season started.
The Red Sox play in a state with 5% income tax rate, and as of a couple of years ago, also features a “millionaires” increased rate—from 5% to 9%—on taxable income that exceeds $1 million, a dollar amount that is indexed for inflation. As Sportico detailed at the time, Massachusetts voters in 2022 approved, by a 52% to 48% vote, the so-called “Fair Share Amendment” to the state constitution for the increased tax. The millionaires’ tax applies to salary, wages and one-time earnings including the sale of homes, investments and inheritance proceeds.
Many players on the Red Sox, New England Patriots, Boston Celtics, Boston Bruins and New England Revolution must pay it. Last year, former New England Patriots head coach Bill Belichick suggested the tax deters free agents from signing with Massachusetts teams.
Nicholas Rochedieu, a partner in the Stamford, Conn., office of PKF O’Connor Davies, told Sportico that other areas of Massachusetts law make deferring some money a strategy for reducing the tax impact.
Although “Massachusetts defines total compensation broadly,” Rochedieu said, state law also “requires that the compensation be paid during the taxable year to a member of a professional athletic team for services performed in that year.”
He added that the state “specifically looks for non-resident professional athletes’ duty days to capture income sourced to the state.”
That setup is key for players who resided in states where there is no income tax or a lower rate than in Massachusetts. A player could save taxes on their deferred money by residing in another state when those deferral payments are made.
“With the deferrals being long after the year of performance, Massachusetts may have a difficult time taxing long-deferred payments,” Rochedieu said.
There is another hurdle for Massachusetts to tax a player in their deferral years, Rochedieu noted, since “states are prevented from taxing certain payments to non-residents by the laws of the United States.”
To that point, he cited Internal Revenue Code Section 114. Under that provision, Rochedieu explained, “payments made to non-residents of non-qualified deferred compensation that meet specific criteria cannot be taxed by that jurisdiction, in this case Massachusetts.”
Rochedieu added that Massachusetts cannot tax a non-resident under IRC 114 if the agreement is both part of a series of equal periodic payments paid not less frequently than annual, and the payment period is not less than 10 years. Both requirements must be met.
To illustrate IRC 114 requirements, the Red Sox recently signed third baseman Alex Bregman to a three-year, $120 million contract that defers $60 million for payments between 2035 and 2046. This contract meets the 10-year deferral requirement, and if the deferred payments are equally staggered over the 10 years, the second requirement would be met as well.
Deferred payments have been used by several MLB teams, including the Los Angeles Dodgers. The team’s contract with Shohei Ohtani, who in 2023 signed a 10-year, $700 million deal, defers about $68 million a year over a 10-year period (2034 through 2043). That means Ohtani will likely avoid paying California’s income tax, with its top marginal rate of 14.4%, so long as he resides outside California during those deferred years.
Deferred money is not without risk. While it can reduce tax bills, downsides include inflation that lower the value of money paid later and loss of interest on the money that could be saved in a bank. Deferring the money also means that money can’t be used for immediate investments.
While mitigating state income taxes could yield sizable savings, it is not a strategy to avoid other taxes. Athletes in Massachusetts and other states must pay federal income taxes, where the highest rate is currently 37% but will climb to 39.6% beginning in 2026 unless Congress passes, and President Donald Trump signs into law, legislation that effectively extends provisions of the Tax Cuts and Jobs Act of 2017. They must also pay payroll taxes (Social Security tax, Medicare tax and the Medicare surcharge), taxes on sales of property, stocks and other assets and, while they play, jock taxes.
But for the Red Sox and other pro teams in Massachusetts, the use of deferred money could help to increase the after-tax value of signings—and make players more likely to sign.
