Shohei Ohtani’s $700M Tax Deferral Strategy: What High-Income Earners Must Know

Let’s be real—when you hear someone landed a $700 million deal, your first thought probably isn’t taxes. But Shohei Ohtani’s record-breaking contract with the Los Angeles Dodgers has become ground zero in a growing tax policy battle. The reason? He’s deferring almost all of that money—and California lawmakers aren’t thrilled.

Now, you might be thinking, “That’s great for athletes, but what does this have to do with me?” Actually, a lot. Whether you’re a tech exec, law firm partner, or entrepreneur pulling in six or seven figures, the strategy Ohtani used is one many high-income earners can leverage—if they understand how it works and the risks that come with it.

Inside Ohtani’s Contract: A Legal Loophole or Smart Tax Planning?

When the news broke about Ohtani’s $700 million contract, the headline everyone missed was the fine print: he’s only taking $2 million per year over the 10-year life of the contract.¹ The remaining $680 million? Deferred until after the contract ends. California State Senator Josh Becker wasn’t amused. He and other lawmakers argue this isn’t retirement income—it’s active compensation for services rendered.² California’s Senate Joint Resolution No. 14 is now urging Congress to cap these types of deferrals.³

Why the outrage? Because once Ohtani finishes playing, he can leave California—and when that $680 million is finally paid out, it could escape California’s high income tax entirely. That’s not an accident; it’s part of the plan.

Federal Tax Rules Make It Possible

Here’s where federal tax law comes into play. Ohtani’s contract likely falls under IRC §409A, which governs how nonqualified deferred compensation (NQDC) is structured—essentially, income that’s agreed to be paid later, typically after services are performed.⁴ Unlike qualified retirement plans such as 401(k)s, which must comply with the Employee Retirement Income Security Act of 1974 (ERISA) and provide tax benefits to both employers and employees, NQDC plans are exempt from most ERISA requirements.⁵ Although NQDC plans offer greater design flexibility, they are subject to strict compliance under IRC § 409A, and violations can trigger immediate income inclusion and a 20% additional tax penalty.⁶ Since NQDC plans are typically unfunded and represent an unsecured promise to pay, they don’t offer the same protections—such as fiduciary duties, funding mandates, or participant rights—as provided under ERISA.⁷ However, when properly structured, NQDC plans allow high earners to legally delay income and the associated taxes until a future date—often when they’re in a lower tax bracket or living in a no-tax state.⁸ In Ohtani’s case, this strategic deferral means the bulk of his earnings won’t be taxed until he receives them years down the road.

Another key statute is 4 U.S.C. § 114, a 1996 federal law created to prevent states from taxing certain deferred income—like pensions—once a taxpayer has moved out of that state.⁹ The legislative intent was to protect retirees from double taxation and ensure states couldn’t reach across borders to tax income earned long before a person relocated.¹⁰ It was necessary because states were increasingly trying to tax retirement income even after individuals had established residency elsewhere.¹¹ While the law was designed with traditional pensions in mind, it also applies to deferred compensation paid in substantially equal installments over 10 or more years.¹² As a result, high earners like Ohtani can now use this provision to lawfully avoid state income tax if they leave before the income is paid.

So under current federal law, if Ohtani receives his $680 million in structured payouts after relocating to a no-income-tax state like Texas or Florida—or even returning to Japan—California is essentially barred from taxing that income.

How Income Deferral Strategies Actually Work

You don’t need a $700 million contract to make deferred compensation work in your favor. The basic principle is simple: delay the income, delay the tax. If you choose to receive income in the future—rather than right away—you don’t pay taxes on it until it’s actually paid. For high earners, this opens up strategic opportunities, such as relocating to a low- or no-income-tax state like Texas or Florida before payouts begin, legally avoiding state income tax altogether. Plus, by deferring income, you’re keeping more money invested longer—potentially growing it further.¹³ When eventually withdrawn, long-term capital gains on investments (held for over a year) are taxed at a maximum federal rate of 20%,¹⁴ with an additional 3.8% Net Investment Income Tax (NIIT) applying to individuals with modified adjusted gross incomes over $200,000 ($250,000 for joint filers) in 2025.¹⁵

There are several vehicles for deferring income. NQDC plans, discussed above, allow employees to earn income now but receive and pay taxes on it later, often during lower-tax years. Rabbi trusts, a common structure for NQDC plans, hold the deferred funds in a trust that remains subject to the employer’s creditors—ensuring no early taxation—while reassuring the employee that the money is set aside.¹⁶ The first of these arrangements was established for a rabbi in the 1980s, hence the unusual name.¹⁷ Other popular deferral tools include equity awards and long-term incentive plans with delayed vesting or exercise periods—meaning employees must stay with a company or meet certain performance goals before cashing in.¹⁸

This type of planning isn’t just for star athletes—it’s a powerful tool for executives, entrepreneurs, and high-income professionals who want to manage tax exposure, maximize investment growth, and retain more of their earnings over time. But, like any sophisticated tax strategy, it must be structured properly to stay compliant and effective.

Legal… But Not Without Controversy

While Ohtani’s strategy is entirely legal under current tax rules, it hasn’t escaped the attention—or criticism—of lawmakers. Many are increasingly concerned that ultra-high earners are leveraging deferred compensation plans, originally intended to resemble retirement savings tools, to shield what is fundamentally active income from immediate taxation.¹⁹ In response, several proposals are gaining traction, including placing caps on how much income can be deferred, limiting deferral benefits for individuals above certain income thresholds, and revisiting 4 U.S.C. § 114 to narrow the scope of what qualifies as exempt deferred compensation.²⁰

From a policy standpoint, states like California and New York argue that these strategies are eroding their tax base. As more high-income individuals use deferral and relocation tactics to avoid state taxes, lawmakers fear they’re losing out on billions in revenue—especially when those earnings are tied to services performed within the state.²¹ With mounting pressure to preserve state tax revenues, legislative efforts to curb aggressive deferral planning may not be far off.

Why High Earners Should Take Note—and What to Do About It

Shohei Ohtani’s contract may be headline-worthy, but the tax strategy behind it has real-world applications for many high-income professionals. If you’re earning $250,000 or more, leading a business, receiving large bonuses, or holding equity that vests over time, deferred compensation might be a powerful tool in your tax planning playbook. This applies to tech founders eyeing an exit, C-suite executives with structured bonus packages, law firm or consulting partners with predictable annual earnings, and anyone considering a move to a low- or no-tax state like Texas or Florida.²² The key is recognizing that when and where you receive income can dramatically impact how much you keep after taxes. But this type of planning isn’t something to wing—it’s complex, highly regulated, and needs to be implemented with precision.

Here’s what this means for you: Ohtani’s strategy is legal, strategic, and—if properly structured—may be replicable for high earners outside of sports. Deferred compensation can significantly reduce both state and federal tax liabilities, but only if it complies with IRS rules under §409A and other relevant laws. One crucial factor is your state of residence when the deferred income is paid, not when it was earned. That’s why proactive planning, especially around timing and relocation, is so essential. Most importantly, work with experienced legal and tax professionals who understand the nuances of nonqualified plans, state residency rules, and the potential pitfalls—because one misstep can turn a tax-saving strategy into a compliance headache.

Planning Ahead: Why Timing—and Strategy—Matter More Than Ever

While Shohei Ohtani’s $700 million deal is in a league of its own, the tax principles behind it are anything but exclusive to the ultra-wealthy. Income deferral remains one of the most underutilized yet powerful strategies available to high-income earners—especially those earning six figures or more. As California’s legislative response makes clear, the window for using these tools under current law may not stay open forever. Whether you’re eyeing a career change, planning a business exit, or simply considering a move from a high-tax state, now is the time to put a thoughtful, compliant strategy in motion. Working with our dual-licensed tax attorney and CPA at Fleurinord Law can help ensure your plan is both legally sound and tailored to your long-term financial goals.

If you’re ready to explore ways to minimize taxes, protect your wealth, or strategically time your income, Fleurinord Law is here to help. We offer sophisticated, confidential tax planning tailored to your unique circumstances and goals. Don’t wait for Congress or your state to change the rules—contact Fleurinord Law today schedule a personalized tax planning session that positions you to act strategically, not reactively.

¹ See David K. Li and Kate Dore, CFP, CNBC, Shohei Ohtani’s $700M Dodgers contract is huge — but its actual value is much lower, NBCNews.com (Dec. 15, 2023), https://www.nbcnews.com/news/amp/rcna129835 (last visited Apr. 3, 2025).

² See Andrew Baggarly, California lawmaker seeks to close Shohei Ohtani tax loophole: ‘It’s a massive hidden ball trick’, New York Times (Apr. 10, 2024), https://www.nytimes.com/athletic/5406619/2024/04/10/shohei-ohtani-tax-loophole-legislation/ (last visited Apr. 3, 2025).

³Id.

⁴ See PricewaterhouseCoopers, Summary of IRC Section 409A – Nonqualified deferred compensation, Viewpoint (Mar. 12, 2025), https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/stockbased_compensat/stockbased_compensat__3_US/chapter_10_plan_desi_US/1010_summary_of_irc__US.html#pwc-topic.dita_1859193812145103 (last visited Apr. 4, 2025).

⁵ U.S. Dep’t of Labor, Emp. Benefits Sec. Admin., FAQs About Retirement Plans and ERISA, https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/retirement-plans-and-erisa-for-workers.pdf (last visited Apr. 4, 2025).

⁶I.R.S., Nonqualified Deferred Compensation Audit Techniques Guide (Pub. 5528, rev. Mar. 2021), https://www.irs.gov/pub/irs-pdf/p5528.pdf (last visited Apr. 4, 2025).

⁷ Id.

⁸Marla J. Aspinwall, Michael Gerald Goldstein & Megan Stombock, Introduction to NQDC as a Problem Solver, in Taxation and Funding of Nonqualified Deferred Compensation: A Complete Guide to Design and Implementation ch. 1 (4th ed. 2021), https://www.americanbar.org/content/dam/aba-cms-dotorg/products/inv/book/413630101/chap1-5431121.pdf (last visited Apr. 4, 2025).

⁹H.R. Rep. No. 109-542, at 2 (2006), https://www.govinfo.gov/content/pkg/CRPT-109hrpt542/html/CRPT-109hrpt542.htm (last visited Apr. 4, 2025).

¹⁰ Id.

¹¹ Id.

¹² Id.

¹³See Aspinwall, supra note 8, at 7 (explaining that deferred salary in a NQDC plan may be credited to an account that grows at an investment rate until paid out during retirement).

¹⁴ I.R.S., Topic No. 409 Capital Gains and Losses (last updated Jan. 2, 2025), https://www.irs.gov/taxtopics/tc409 (last visited Apr. 4, 2025).

¹⁵I.R.S., Questions and Answers on the Net Investment Income Tax (last updated Sep. 13, 2024), https://www.irs.gov/taxtopics/tc409 (last visited Apr. 4, 2025).

¹⁶ I.R.S., Notice 2000-56, 2000-2 C.B. 393, https://www.irs.gov/pub/irs-drop/n-00-56.pdf (last visited Apr. 4, 2025).

¹⁷ I.R.S. Priv. Ltr. Rul. 8113107 (Dec. 31, 1980).

¹⁸ See Aspinwall, supra note 8, at 18-19 (discussing how nonqualified deferred compensation arrangements may include delayed vesting schedules and performance-based conditions as incentive tools to retain key employees).

¹⁹See H.R. Rep. No. 109-542, supra note 9, at 3 (noting that Congress extended protections under 4 U.S.C. § 114 to prevent high-income individuals from manipulating deferred compensation payments to avoid state taxation).

²⁰See Associated Press, California Controller Urges Congress to Cap Tax-Deferred Pay After Shohei Ohtani’s $700M Deal, APNews.com (Jan. 26, 2024) (reporting proposal to limit deferral benefits for ultra-high earners), https://apnews.com/article/shohei-ohtani-deferred-money-98d3ba769cee8d1d099589ed5cacd4ae (last visited Apr. 7, 2025); Farrell Fritz, P.C., Leaving New York? Plan for the Taxation of Deferred Compensation, Tax Law for the Closely Held Business (Mar. 1, 2021) (noting potential state efforts to narrow 4 U.S.C. § 114 exemption scope), https://www.taxlawforchb.com/2021/03/leaving-new-york-plan-for-the-taxation-of-deferred-compensation/ (last visited Apr. 7, 2025).

²¹ Associated Press, supra note 20 (discussing concerns over high earners relocating to avoid state taxes); Farrell Fritz, P.C., supra note 20 (explaining how states assert tax jurisdiction over deferred comp tied to in-state services).

²² As of 2025, nine U.S. states do not impose a personal state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee (which fully phased out its tax on interest and dividends in 2021), Texas, Washington (which does not tax wages but has enacted a capital gains tax), Wyoming, and New Hampshire (which repealed its tax on interest and dividends, fully phasing it out as of January 1, 2025).