Why you should pity Phil Mickelson

February 07, 2013

MSN Money

Does Phil Mickelson have a legitimate beef when it comes to his taxes? The Hall of Fame golfer and one of the world’s highest-paid athletes recently caused a stir when he threatened to move out of his native California — and hinted at perhaps even retiring from golf — because of his high state and federal tax rates.

Mickelson reportedly earned nearly $48 million last year. He was reacting in part to California’s newly passed Proposition 30, which raises the state tax rate on people earning more than $1 million from 10.3% to 13.3%.

Or, to quote Salary.com, “How does a man worth hundreds of millions end up with a tax rate similar to that paid by a household earning $50,000 per year?”

One big difference is in their jobs. “If you look at someone like a professional athlete, they are earning their income through their services, through labor, similar to a construction worker,” says Sharon Lassar, a director of the school of accountancy at the University of Denver’s Daniels College of Business. “And income that is earned through labor is ordinary income that is subject to U.S. taxes today as high as 39.6%. That’s after the legislation that was passed to deal with the fiscal cliff; it was lower before that.”

In comparison, Romney’s income likely came through capital gains — the profits from selling assets such as real estate or stocks — acquired through his partnership with firms that buy and sell other companies. “And the sale of those underlying companies is a capital gain; it generates a capital gain to the partnership,” Lassar says.