If you look at any number of celebrities or athletes who have gone broke, they all seem to have one thing in common: they owe a ton of money in back taxes to the IRS.
From Nicolas Cage to Wesley Snipes to former running back Jamal Anderson, celebrities and athletes who are making millions of dollars per year apparently aren’t getting the right financial advice. Now, former baseball star (and admitted steroid user/whistle-blower) Jose Canseco is filing bankruptcy, owing a half a million dollars to the IRS.
From ESPN.com:
The bankruptcy petition says the 48-year-old Canseco lives in Las Vegas.
The filing was first reported by the Las Vegas Sun.
It lists less than $21,000 in assets and almost $1.7 million in liabilities, including more than $500,000 owed to the Internal Revenue Service.
Why is it that so many athletes and celebrities not effectively plan for and pay their taxes? Besides getting poor advice, any number of excuses can cause these ridiculous results. USA Today walks through some of them:
In rare instances, wealthy people may not know what they owe the IRS, Levy says. For example, limited partnerships can sometimes generate “phantom income” — a tax obligation that can occur years before the money actually arrives.
But mostly, entertainers get in tax trouble because they expect peak earnings to last indefinitely, says Dennis McGoldrick, a veteran bankruptcy lawyer in Torrance, Calif. “Their income revs up, and their spending revs up. These people don’t save any money. They get a big house. Then work dries up and they can’t pay their taxes. It’s a fairly common occurrence,” he says.
Abrupt income drops
An entertainer may see income drop unexpectedly from $10 million a year to $1 million after a canceled TV show, a movie that bombs or a concert tour cut short by a bandmate’s illness. Mortgage payments and investing in the next project may take priority over paying the estimated quarterly income taxes the IRS wants.
The IRS generally will settle the tax debt with a five-year payment plan based on an entertainer’s current assets and earnings, McGoldrick says. But that can force performers to face harsh realities about their careers and lifestyles.
For example, the IRS expects tax debtors to sell their homes — often mansions — to convert the home equity into cash and re-direct the mortgage payment to the government. “It’s hard to explain why you’re paying $50,000 a month on a mortgage rather than giving that money to the IRS,” says Levy, the tax lawyer.
Obviously, there are stupid decisions being made here. But it’s all avoidable. As any self-employed person will tell you, you need to set aside money for taxes when you get paid using an intuitive tax refund estimator.
You never want to be in a situation where you can’t pay your taxes. If you set aside a percentage of your income when you get it, you’ll be able to pay the bill. It’s not that hard, folks.
