Investment Coordination for Athletes in Chicago

No. The Reed Corporation is a CPA and tax firm. We are not a registered investment adviser. We do not manage portfolios, we do not select securities, we do not sell products, and we do not provide investment management in the advisory sense that word usually carries. Investment coordination for athletes in Chicago means something narrower and, in our experience, much harder to find. It is the tax work that sits around an athlete’s investment activity once somebody else, properly licensed, has made the investment decisions.

Athletes get pitched more than almost anyone. A twenty-four year old with a guaranteed contract hears from people who want to manage the money, people who want to sell insurance wrapped as a plan, and people who want a piece of a restaurant. Our role is the boring one at the other end of that room. The adviser decides what to own. We decide nothing about what to own. What we do is measure what the ownership costs in tax, report it correctly, and tell the athlete and the adviser what a proposed move does to the April number before the move happens rather than after.

The line matters legally, not only as a matter of tone. A registered investment adviser carries a registration we do not carry and answers to a regulator we do not answer to. So when an athlete asks us whether a fund is a good buy, the honest answer is that the question belongs to the adviser, and we hand it back. When the same athlete asks what that fund’s distributions will do to next April, reported to them on a Form 1099-INT or its dividend cousin, the question is squarely ours and we answer it in writing.

In practice that work is specific. We track cost basis across accounts and across years. We report realized gains and losses on Form 8949 and Schedule D. We compute the Net Investment Income Tax on Form 8960. We read the dividend reporting on Form 1099-DIV against what the accounts actually did. The tax treatment of all of it is laid out in Publication 550, which is the reference we work from.

Here is what that looks like with a number attached. An athlete’s adviser proposes selling a position in December with a 12,000 dollar long-term gain in it. We have no opinion on whether the position should be sold, and we do not offer one. We do say what the 12,000 dollars costs. Federal long-term capital gains tax at 15 percent is 1,800 dollars. Net Investment Income Tax at 3.8 percent adds 456 dollars, because this athlete’s income sits far above the threshold. Illinois takes 4.95 percent, another 594 dollars. The total is about 2,850 dollars, close to 24 percent of the gain. The adviser then makes the call with a real figure in hand instead of a rounded guess.

The common mistake is assuming one person can hold every seat. An athlete hears that a firm will handle the money and the taxes and the planning under one roof, and it sounds efficient. Efficient is not the same as licensed. We stay on the tax side on purpose, and the athlete keeps an adviser who answers to a different regulator than we do. Our tax strategy consulting group runs the coordination, and our individual tax return team files what comes out of it. An athlete who sets those lanes up in year one keeps them for the whole career, including the long part that comes after the playing stops.

Basis is the number that decides how much of a sale is gain and how much is just the athlete’s own money coming back. Get it wrong and the athlete pays tax on money they already paid tax on. The rules live in Publication 551, and the reporting rules that sit on top of them are in Publication 550. Tracking basis is tax work, not investment work, which is why it lands on our desk rather than the adviser’s.

Brokers report basis to the IRS for most stock bought after 2011, and for those covered lots the number that shows up in January is usually right. The trouble is everything else. Shares acquired before the covered rules took effect carry no reported basis. Shares moved from one firm to another sometimes arrive with the basis stripped. Shares received as a gift carry the giver’s basis, which nobody at the brokerage knows. Shares inherited get a basis stepped to date-of-death value, which the brokerage also does not know unless someone tells it. An athlete who has changed advisers twice, which is common, has almost certainly lost basis history somewhere along the way.

Reinvested dividends are where we find the most money. Suppose an athlete has held a fund for six years and reinvested 12,000 dollars of dividends across that period. Those dividends were taxed in the year they were paid, reported on a Form 1099-DIV each January. Every reinvested dollar bought shares, and every one of those dollars belongs in basis. If the reinvestments never make it into the basis figure, the athlete pays capital gains tax on that same 12,000 dollars a second time at sale. At 15 percent federal, 3.8 percent Net Investment Income Tax, and the Illinois flat rate of about 4.95 percent, that duplicate bill runs roughly 2,850 dollars on a single fund position.

Private deals need their own file. Athletes get offered equity in restaurants, in gyms, and in startups founded by somebody’s cousin. Those interests produce a Schedule K-1 rather than a brokerage statement, and basis in a partnership interest moves every year with income, losses, and distributions. When the interest is eventually sold or the venture folds, the basis history is what proves the loss. We keep that running schedule from the first capital contribution, because reconstructing it eight years later from bank records is an expensive exercise with an uncertain answer.

Wash sales are the quiet trap. Sell at a loss and buy back the same security inside thirty days on either side and the loss is disallowed for now, folded into the basis of the replacement shares instead. Brokers apply the rule inside one account. They do not see the athlete’s other account at another firm, or a spouse’s retirement account. That is exactly the kind of cross-account view that comes from having one tax file rather than four statements nobody ever compares.

The common mistake in investment coordination for athletes in Chicago is trusting the year-end brokerage figure without checking it against the athlete’s own history. It is a starting point, not a verdict. Our bookkeeping team keeps the basis schedules current alongside the athlete’s business records, and our individual tax return group carries them onto Form 8949 each spring. Basis kept year by year is nearly free. Basis rebuilt at sale is neither free nor certain, and the athlete usually pays for the gap.

The Net Investment Income Tax is a flat 3.8 percent that sits on top of whatever else the investment income already owes. It applies to the smaller of two figures. The first is net investment income for the year. The second is the amount by which modified adjusted gross income exceeds a threshold, being 200,000 dollars for a single filer and 250,000 dollars on a joint return. It is computed on Form 8960, and it has not been indexed for inflation since it took effect, so more people cross it every year.

For a professional athlete, the threshold test is almost never the binding one. Club salary reported on a Form W-2 is not itself net investment income, and neither is active endorsement income. Both push modified adjusted gross income far past the threshold anyway. The result is simple and worth saying plainly. For most athletes with a real contract, effectively every dollar of investment income carries the 3.8 percent, from the first dollar, because the threshold was cleared before the market opened in January.

What counts as net investment income is broader than most people expect. Interest reported on Form 1099-INT counts. Dividends count. Capital gains count. Rents and royalties count when the activity is passive, which is where the rules in Publication 925 start to matter, since an athlete who owns rental property and never sets foot in it is passive by any reading. Income from a business in which the athlete materially participates is outside the tax. Income from a restaurant the athlete invested in and never works at is inside it.

Run the arithmetic on 12,000 dollars of dividends and realized gains in a year. The Net Investment Income Tax on that is 456 dollars. Federal capital gains tax at 15 percent adds 1,800 dollars if the gains are long term, or considerably more at ordinary rates if they are short term. Illinois adds 594 dollars at the flat rate of about 4.95 percent, since the state, per the Illinois Department of Revenue, gives capital gains no break at all. The same 12,000 dollars earned by an athlete living in Austin would skip the state layer entirely.

The planning here is real but it is tax planning, not investment advice. Timing a realization into a year with lower other income changes the answer. So does making sure a loss carryforward from an earlier year is actually on the books and available. So does knowing whether investment interest expense properly reduces net investment income on the form. We bring those observations to the athlete and to the athlete’s own adviser, and the adviser decides what, if anything, to do about them.

The common mistake is discovering the 3.8 percent in April, after the year has closed and nothing can move. The second most common is forgetting that this tax is not withheld by anyone, which means it has to be funded through estimated payments under Form 1040-ES or it turns into a penalty. An athlete who sees the Net Investment Income Tax modeled in October has options. One who meets it on a filed return has a bill and a lesson.

Illinois runs a flat individual income tax of about 4.95 percent, and the flatness is the whole story for investment income. There is no preferential state rate for long-term capital gains. A gain the IRS taxes at 15 percent because the athlete held the position for six years is taxed by Illinois at exactly the same 4.95 percent as a savings account paying interest. The federal system rewards patience. The Illinois system, administered by the Illinois Department of Revenue, is indifferent to it.

That indifference has a practical consequence. A Chicago athlete comparing a long-term realization to a short-term one is comparing federal rates only. The state cost is the same either way, which means the total spread between holding and selling early is narrower in Illinois than a federal-only model suggests. On 12,000 dollars of long-term gain, Illinois takes 594 dollars. On 12,000 dollars of short-term gain, Illinois takes the same 594 dollars while the federal bill roughly doubles. We put both figures in front of the athlete’s adviser, and the adviser decides.

Entity structure adds a layer that surprises people. If investment assets sit inside a partnership or an S corporation rather than in the athlete’s own name, Illinois may reach that entity’s income through the Personal Property Replacement Tax at roughly 1.5 percent. Athletes who formed an LLC for endorsement work and then parked investment assets in the same entity, because it seemed tidy, sometimes find they built a second layer of state tax around income that would have been taxed once if held personally. That is a structural question worth asking before the assets move, not after.

Illinois does one thing that works strongly in an athlete’s favor later. The state does not tax qualified retirement income. Distributions from a qualified plan or an individual retirement account, the ones reported on a Form 1099-R, come out free of Illinois tax even though they are fully taxable federally. For an athlete whose earning years are compressed into a short window, that treatment makes the retirement rules in Publication 590-A and the plan options in Publication 560 worth a serious conversation while the contract money is still arriving.

Municipal bonds deserve a caution. Interest that is free of federal tax is not automatically free of Illinois tax, and the state requires an addback for interest on certain out-of-state obligations. A bond bought for its tax-free coupon can behave differently for a Chicago resident than the marketing sheet implied. That question belongs to us and to the athlete’s adviser together, before the purchase settles.

The common mistake is importing framing from a former city. An athlete traded from Miami or drafted out of a Texas school carries a mental model in which investment income costs nothing at the state level, because in Florida and Texas there is no state income tax on it. Illinois is not that. Every dollar of dividends, interest, and realized gain now carries a state cost that did not exist in the prior season. Our tax strategy consulting group rebuilds the model at the trade, and our individual tax return team files against the new one. An athlete who resets that expectation in the first Illinois year avoids a very unpleasant April in the second.

It works by staying in our lane and being loud about where the lane ends. The athlete’s investment adviser holds the license to advise on securities and to manage the portfolio. We hold a CPA license and we do the tax work. Nothing in this arrangement makes us an investment adviser, and we do not want the job. What we bring to the table is the only complete picture of what the athlete’s decisions cost after tax, which the adviser generally cannot see because the adviser does not have the endorsement income, the entity returns, or the Illinois filings.

The cadence is quarterly, with one call in November that matters more than the rest. We send the adviser a running realized gain and loss position for the year, the loss carryforwards still available, and the basis schedules we maintain across every account and private deal. The adviser sends us statements, trade confirmations, and any Schedule K-1 that showed up from a venture nobody warned us about. Then the athlete hears one number rather than two conflicting ones.

Consider a November call. The adviser is weighing a rebalance that would realize 12,000 dollars of gain. We do not vote on the rebalance. We report that the 12,000 dollars would cost about 1,800 dollars federally at long-term rates, 456 dollars in Net Investment Income Tax on Form 8960, and 594 dollars to Illinois, roughly 2,850 dollars in all. We also report that an old capital loss carryforward of 9,000 dollars is sitting unused, which would absorb most of the gain and drop the real cost closer to 700 dollars. The adviser now has information the statements never showed. The decision stays with the adviser and the athlete.

The other half of coordination is funding what the decisions create. Investment income has nothing withheld against it. When gains get realized in December, the tax on them is due through estimated payments under the rules in Publication 505, and an athlete who skips the fourth installment can end up owing a penalty on Form 2210 even though the return itself is filed on time and paid in full. We size those payments off the closed books rather than off a guess, and Illinois wants its own installments on its own schedule.

The common mistake is silence in both directions. An athlete signs into a private deal in March and mentions it in September when the K-1 arrives, by which point the entity choice is set and the basis history has a hole in it. Or an adviser realizes gains in a quiet week without knowing an endorsement bonus already landed that quarter and pushed the athlete into a different bracket. Neither party did anything wrong. Nobody had told them what the other one knew. An athlete who wants that loop closed properly can request a consultation and we will set the reporting rhythm with the adviser directly.

Our bookkeeping team keeps the underlying records clean so the quarterly package is real rather than approximate, and the tax treatment we apply traces back to Publication 550 every time. An athlete who builds this habit early carries it into the years after the last contract, when the investment income is the whole income and every point of tax on it counts twice as much.