For teams with higher payrolls, or who have signed a free-agent to a high salary, or traded for high-salary players, a luxury tax may be triggered.
The luxury tax is triggered when a team's payroll exceeds $125M.
When a player's salary is more than $12.5M per year, an additional luxury tax is triggered. This luxury tax is calculated as follows:
See How the Tax Is Assessed below for examples of how this works.
The following following chart lays out how the luxury tax is applied based on a team's total payroll.
| Payroll Range | Example Payroll | Tax Amount | % Tax |
|---|---|---|---|
| No luxury tax | |||
| $0--$124.99M | $119.5M | $0 | 0 |
| 1% at $125M, + 1% per $5M above $125M | |||
| $125M--$145.99M | $125M | $1.25M | 1 |
| $130M | $2.60M | 2 | |
| $135M | $4.05M | 3 | |
| $140M | $5.60M | 4 | |
| $150M | $7.50M | 5 | |
| Plus 1.5% per $5M above $150M | |||
| $155M--$200.99M | $155M | $11.625M | 7.5 |
| $160M | $14.400M | 9 | |
| $165M | $17.325M | 10.5 | |
| $170M | $20.400M | 12 | |
| $175M | $23.625M | 13.5 | |
| $180M | $27M | 15 | |
| $185M | $30.525M | 16.5 | |
| $190M | $34.200M | 18 | |
| $195M | $38.025M | 19.5 | |
| $200M | $42M | 21 | |
| 23% at $201M, + 2% per $1M above $201M | |||
| $201M--$250.99M | $201M | $46.23M | 23 |
| $202M | $50.50M | 25 | |
| $203M | $54.81M | 27 | |
| ... | |||
| $250M | $302.5M | 121 | |
| 121% at $251M, + 10% per $1M above $251M | |||
| $251M+ | $251M | $303.71 | 121 |
| $252M | $330.12M | 131 | |
| $253M | $356.73M | 141 | |
| ... | |||
| $299M | $1.797B | 601 | |
| ... |
The luxury tax is assessed on a daily basis, which means each day of the season (in league days), the payroll is taxed at the appropriate rate, for one day's worth of tax. There are 180 League days each season (accounting for off-days).
Here are some examples:
Team A has a payroll of $130M on day one, which is taxed at 2%. At that rate, the annual tax would be $2.60M. Divided by 180 days, the team would be taxed $14,444 each day the payroll remained at $130M.
On day 30, Team A trades away a player, dropping payroll to $123M. Now there is no luxury tax applied. The team would have paid a total of $433,333 in luxury tax over the 30 days, and saved $2.17M in future luxury taxes by dropping payroll below the taxation trigger.
Team B signs Player Z for $15M a year, which trips the Individual Salary Trigger. That salary divided by 5M equals 3. The team payroll will be taxed at 3%. The team payroll is $100M, so the team will pay $3M in luxury tax for that one player over the course of the season.
Team C has a payroll of $150M, and is currently being taxed at a rate of 9%, for a total of $7.5M. They sign Player Y for $15M, tripping the Individual Salary Trigger. They also sign Player X for $20M, which is also an Individual Salary Trigger. The team payroll has been raised to $185M, which is taxed at a rate of 16.5%. Player Y's $15M salary has triggered an additional 3% taxation, and Player X's $20M has triggered an additional 4%. The Payroll Tax of 16.5%, plus the combined Individual Salary Taxes of 7%, means the team's $185M payroll will now be taxed at a rate of 23.5%. Team C's luxury tax has increased from $7.5M to $43.48M just by adding two high-priced players.
Team E has a pre-season payroll of $130M, which will be taxed at a rate of 2% for a total of $2.6M. The team is carrying a bench player making $6M for each of the next three seasons. The Projected Luxury Tax Disbursement for the season is $20M. Team E releases the bench player before the season, and pays the full $18M of salary from cash reserves. Team E’s payroll decreases to $124M, saving $2.6M in luxury taxes, and entitling them to a share of the luxury tax disbursement. This would net them $10.6M in year one ($20M disbursement + $2.6M saved taxes + $6M decreased payroll - $18M cash payout), and decrease payroll by $6M for each of the two following years.
Team F has a pre-season payroll of $126M, which will be taxed at a rate of 1% for a total of $1.26M. The team is carrying a bench player making $6M for each of the next three seasons. The Projected Luxury Tax Disbursement for the season is $20M. Team F trades the bench player before the season, subsidizing $2M of the player's salary each of the next three seasons. Team F’s payroll decreases to $122M, saving $1.26M in luxury taxes, and entitling them to a share of the luxury tax disbursement. This would net Team F $25.26M in year one ($20M disbursement + $1.26M saved taxes + $4M decreased payroll), and decrease payroll by $4M for each of the two following years.
During the offseason, qualifying teams (teams who have not been charged the luxury tax during the regular season) will receive an equal portion of any luxury tax collected.