NBA teams can become hard-capped during a given league year if they use specific cap exceptions or make certain transactions, but the league doesn’t have a hard cap in place for all its teams.
However, in addition to its soft cap, the league does have a luxury tax threshold, which serves to discourage excessive spending. When a team’s total salary is over that line at season’s end, the NBA charges a tax for every surplus dollar the club spends.
The luxury tax line is set each season at 121.5% of the salary cap threshold, rounded to the nearest thousand. In 2024/25, the league’s salary cap is set at $140,588,000, so the luxury tax threshold is $170,814,000. That means any team whose total ’24/25 salary exceeds $170,814,000 on the last day of the regular season is subject to a tax bill.
The NBA’s luxury tax system is set up so that the penalties become more punitive the further teams go beyond the tax line. Teams who are in the first tax bracket will pay a significantly less significant tax rate per dollar than teams operating in the third or fourth bracket (or beyond).
In 2023/24, the amount of each tax bracket was $5MM, which meant a team faced an increased tax rate once its total salary surpassed $5MM over the tax, $10MM over the tax, $15MM over the tax, and so on.
In 2024/25 and in subsequent seasons, the size of those tax brackets will increase at the same rate as the salary cap. For example, since the cap rose by about 3.36% from ’23/24 to ’24/25, the size of each tax bracket increased by 3.36% too, from $5MM to $5,168,000.
Here’s what the luxury penalties will look like in 2024/25:
Tax bracket |
Amount above tax line |
Tax rate (per $) |
Maximum penalty |
---|---|---|---|
1 | $1 – $5,168,000 | $1.50 | $7,752,000 |
2 | $5,168,001 – $10,336,000 | $1.75 | $9,044,000 |
3 | $10,336,001 – $15,504,000 | $2.50 | $12,920,000 |
4 | $15,504,001 – $20,672,000 | $3.25 | $16,796,000 |
For each additional $5,168,000 above the tax line beyond $25,840,000 a team operates, its tax rates increase by $0.50 per dollar of team salary. So, the penalty is $3.75 per dollar between $20,672,001 and $25,840,000, $4.25 per dollar between $25,840,001 and $31,008,000, and so on.
Here’s a practical example of how the tax penalties work. The Nuggets currently have a team salary of $182,574,315, which is above this season’s tax line by $11,760,315, putting them in the third tax bracket. Denver’s total salary will likely move up or down before the season is over, but the team’s current projected tax bill is $20,356,788. That’s based on a penalty of $7,752,000 from the first tax bracket, $9,044,000 from the second, and $3,560,788 from the third (a penalty of $2.50 per dollar on $1,424,315).
The rates listed above apply to most taxpayers, including 10 of the 14 teams currently in the tax for 2024/25: the Nuggets, Suns, Timberwolves, Celtics, Knicks, Heat, Sixers, Mavericks, Pelicans, and Cavaliers. However, a team can become subject to a more punitive “repeater” penalty if it paid the tax in at least three of the previous four seasons.
This scenario currently applies to four teams — the Warriors, Clippers, Bucks, and Lakers paid the tax at least three times from 2021 to 2024, which means they’ll be repeat offenders this season.
Here are the penalties that apply to repeat taxpayers in 2024/25:
Tax bracket |
Amount above tax line |
Tax rate (per $) |
Maximum penalty |
---|---|---|---|
1 | $1 – $5,168,000 | $2.50 | $12,920,000 |
2 | $5,168,001 – $10,336,000 | $2.75 | $14,212,000 |
3 | $10,336,001 – $15,504,000 | $3.50 | $18,088,000 |
4 | $15,504,001 – $20,672,000 | $4.25 | $21,964,000 |
As is the case with the standard penalties, the tax rate continues to increase by $0.50 per tax bracket, so a repeater taxpayer in the fifth bracket would face a tax rate of $4.75 per dollar; that would increase to $5.25 per dollar in the sixth tax bracket, and so on.
The Clippers are currently carrying $173,279,116 in total salary, surpassing the tax line by $2,465,116. Because they’re charged $2.50 per dollar as a repeater taxpayer, their projected tax bill is $6,162,790 instead of the standard rate of $3,697,674.
The further into tax territory a team goes, the greater the difference between the repeater rate and the standard rate becomes. For instance, the Bucks’ projected tax bill at the moment is $74,837,699. If they weren’t subject to repeater penalties, it would be just $52,554,394.
The 2024/25 season is the last one in which the rates outlined above will apply. Beginning in 2025/26, the NBA is adjusting the tax rates to make them even more punitive for repeater taxpayers and heavy spenders. Conversely, the penalties for standard taxpayers who finish the season in one of the first two tax brackets will be lowered.
Here are the changes coming next season:
Tax bracket |
Standard tax rate (per $) |
Repeater tax rate (per $) |
---|---|---|
1 | $1.00 | $3.00 |
2 | $1.25 | $3.25 |
3 | $3.50 | $5.50 |
4 | $4.75 | $6.75 |
These rates will continue to increase by $0.50 per tax bracket beyond the fourth bracket.
The goal of these tweaks is to discourage teams from soaring way beyond the luxury tax line without making the tax line itself a major deterrent.
Since luxury tax penalties are calculated by determining a team’s total cap hits at the end of its season, a team that starts the year above the tax line could get under it before the end of the season by completing trades or buyouts. The Pelicans did just that in 2023/24, moving out of tax territory by salary-dumping Kira Lewis‘ expiring contract in January.
New Orleans is one of just two NBA teams that has never been a taxpayer (Charlotte is the other) and is operating only narrowly above the tax line this season, so it wouldn’t be a surprise to see the team make another mid-season deal to duck the tax.
It’s also worth noting that team salary for tax purposes is calculated slightly differently than it is for cap purposes. Here are a few of the adjustments made at season’s end before a team’s tax bill is calculated:
- Cap holds and exceptions are ignored.
- “Likely” bonuses that weren’t earned are removed from team salary; “unlikely” bonuses that were earned are added to team salary.
- Note: Bonuses based on playoff-related criteria can be removed or added to team salary after the regular season ends. In that scenario, a team’s tax bill is based on its salary at the end of the team’s season (ie. its playoff run), not the end of the regular season.
- If a player with a trade bonus is acquired after the final regular season game, that trade bonus is added to team salary.
- If a rookie or second-year player signed a minimum-salary free agent contract, the applicable minimum-salary cap charge for a two-year veteran is used in place of that player’s cap charge.
- Note: This “tax variance” rule only applies to free agents, not drafted players.
So let’s say that five teams finish the season owing a total of $75MM in taxes. Where does that money go? Currently, the NBA splits it 50/50 — half of it is used for “league purposes,” while the other half is distributed to non-taxpaying teams in equal shares. In our hypothetical scenario, the 25 non-taxpaying teams would receive $2MM apiece.
As cap expert Larry Coon explains in his CBA FAQ, “league purposes” essentially covers any purpose the NBA deems appropriate, including giving the money back to teams. In recent years, the NBA has used that money as a funding source for its revenue sharing program.
Coon also notes that the CBA technically allows up to 50% of tax money to be distributed to non-taxpaying teams, but there’s no obligation for that to happen — in other words, the NBA could decide to use 100% of the tax money for “league purposes.”
Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ was used in the creation of this post.
Earlier versions of this post were published in previous years.
Interesting read. Would be nice to see the current projected luxury tax and the payout per team if all stays the same. (Even though we know some will still duck under the luxury tax limit)
link to salaryswish.com
Currently there are 14 taxpayers who owe a total of 712M. If half of that is redistributed, the 16 non-taxpayers will each receive 22.2M.
Pels, Cavs, and Clippers are the teams with the most direct ways to duck under. I don’t know if the Clippers will dip into their already dwindling assets to do so, since their bill is only 6.5M, a relative pittance to what they used to pay with PG on the roster.
I think that estimate is high since that site considers the Celtics, Nuggets, and Suns to be repeater taxpayers, which I don’t believe they are. (Their interpretation of the repeater rule is that “three of the previous four seasons” includes the current season, which isn’t how I read or understand it.)
Googled it a bit and others seem to agree with you: link to notradeclause.com
So the wrong estimates are: Boston 92 million, Nuggets 32 million and Suns 244 million.
So 344 million plus the luxury tax of those three.
Difference is 1 dollar per dollar over the limit, should be easy to estimate.
@Wannes I have the following estimates for those three teams:
Boston: Around $66MM
Denver: $20.36MM (as mentioned in my post)
Phoenix: $185.4MM
Yeah, the CBA might seem murky about some things, but it couldn’t be more clear about this. The repeater tax applies,
“for any Team whose Tax Team Salary exceeded the Tax Level in three (3) or more of the four (4) Salary Cap Years immediately preceding such Salary Cap Year.”
@xdrta Yeah, SalarySwish’s interpretation hinges on the tax penalties being calculated after the current salary cap year finishes, making the year in question a “preceding” year, but the CBA doesn’t support that reading.
I went back and double-checked some past years’ penalties just to make sure my reading is correct, and it is (in 2023, for instance, there were a bunch of teams paying the tax for a third straight year, but only the Warriors – who had paid it in 2019 as well as in 2021 and 2022 – were charged the repeater rate).
Suns have 226 million salary, Boston 199 million and Denver 186 million.
With the limit ar approx. 171 million, that makes 55 less for Suns, 28 for Boston and 15 for Denver. Makes about 98 million less in luxury taxes.
Leaves us at 614 million luxury taxes. With 16 teams would be 19.2 million a piece.
Remove the 5 million from New Orleans, 6.5 million for Clippers and 3.8 million for Cleveland and we are at 598 million in luxury taxes.
299 million would then go to 19 teams: 15.7 million per team seems realistic.
Nice bonus for New Orleans, Clippers and Cleveland to avoid the luxury tax.
For the Clippers it might be extra interesting given their repeater tax status?
For Clippers: 2023 and 2022 they were above, but 2021 below? So if they duck this year, they wouldnt have the punitive luxury tax next season as only 2/4 (2023 and 2022) would be above.
If they go over it next season, starting in 2025, they would have repeater in 2026 though. If they also duck in 2025 and go above as of 2026, they can only get repeater again in 2030.
We will have to see if they keep on spending without a realistic chance at a title or spend less for the next two seasons to afford higher salaries as of 2026…
@Wannes: Clippers were in the tax each of the past four years (2020, 2021, 2022, 2023) so they’d need to get out of it for two years to reset the repeater clock.
Thanks. Didnt check the tax limkt in 2021 but guess they were not much above it.
Simply replacing PJ Tucker with someone 8,93 million or less does the trick though.
If they can dump PJ Tucker for a player like Dosunmu, Ziaire Williams, Dyson Daniels, Malik Beasley, Chris Duarte, Reggie Jackson, … and only give up a 2nd round pick plus cash, it seems worth it?
It makes it more difficult to increase team salary in the years after though.
But it gives them flexibility to get out of repeater tax if they stay under for just one more year after this …
So I guess for Clippers it is 50/50 and will depend on team performance the next months.
My Warriors are another one. If they can dump $5.8M by the deadline they can get out of the tax this year and start the clock on avoiding repeater tax hell in upcoming years.
Warriors are a better team than the Clippers though.
But they dont have a trade candidate as obvious and easy as PJ Tucker though.
I imagine if staying out of the tax was a main priority, the Warriors wouldn’t have spent 30M on free agents and also kept Looney at 8M when the stretch provision would have reduced his dead cap hit to 1M over 3 years.
More likely Clippers avoid the tax than the warriors.
“the Warriors wouldn’t have spent 30M on free agents”
The Warriors signed one FA, Melton, for the MLE, $12.8M.
Then how would you describe 8.7M each for Anderson and Hield? They were free agents too.
They were traded for.
Simply replacing PJ Tucker with someone 8,93 million or less does the trick.
If they can dump PJ Tucker for a player like Dosunmu, Ziaire Williams, Dyson Daniels, Malik Beasley, Chris Duarte, Reggie Jackson, … for a 2nd round pick, it seems worth it to me. But will they find any takers?
Several of the players you mentioned are on teams with tax concerns of their own or are too valuable to part with for a guy who would be bought out immediately. Detroit has the cap space but it will cost more. I think the Rockets and Wizards have matching salary or trade exceptions to send back without going into the tax themselves, but want to keep their options open at the deadline.
Just gave some examples without analysing in depth.
Not sure Clippers should spend more than one 2nd rounder plus max cash to avoid the tax. Giving up their 2026 and 2030 2nd rounders leaves them without 2nd rounders…
Memphis (12.6m), Dallas (16.2m), Washington (12.4m), Atlanta (25.2m), Brooklyn (23.3m) and Chicago (17.5m) seem the only teams with a big enough trade exception.
But Dallas, Atlanta, Brooklyn and Chicago might get more value facilitating a deal as a third team for a player with a higher salary, prefer to use it for themselves or have tax concerns.
Only trade exception that makes sense is Washington. But could they get Johnny Davis (5.3 million) for PJ Tucker (11.5 million) + 2026 2nd rounder + 7,24 million in cash?
Washington would earn a little over 1 million plus a 2nd rounder for their trade exception and a young player on an expiring contract that barely plays. Could end up happening if both teams dont find anything better?
Wannes- Problem isnt with the trade exceptions its moreso that about 85% + of the league is right up against some form of line (tax/ aprons) that they don’t want to cross by taking on more money. Not to mention that apron 1 and 2 teams cant take on more money in trades ….thats half the league itself
* With the Clippers sitch I dont think Steve will mind taking from pocket and just save the precious few assets they have
They can reset next year rather easily and the years thereafter
Yeah, I was thinking Tucker for Davis too. Davis can just spend the rest of the year in San Diego auditioning for his next opportunity. The other teams you mentioned can all do better than this.
The Clippers only have 2.9M in cash, having spent the rest to dump Westbrook. So that dampens the appeal for Washington. However, that amount could cover the difference between Tucker and Houston’s JaeSean Tate/Jeff Green after the deadline (1.5M). Detroit is an option if they find nothing better. Maybe Orlando’s Gary Harris if they decide not to exercise next year’s team option.
Which are the teams that could take on salary without too much issue?
If the list is that limited, cap space or exceptions might be quite valuable towards the trade deadline.
Regarding: apron teams cannot take back more salary than they send out: does that also apply to exceptions?
Forgot about the cash in the Westbrook trade.
Also thought about the JaeSean Tate option, but would find it a wrong move for Houston.
The main option seems Tucker for Davis.
But with only 2.9 million in cash, that would mean they take on 6.2 million in salary and give up their trade exception plus part of the ability to receive cash.
By helping the Clippers duck under the tax, they reduce their luxury tax distribution this year and potentially future years. Although this year would be limited: would be 302 million going to 18 teams: 16.8 million vs. 15.7 million.
Net result would be that Washington pays 4.4 million for the Clippers 2nd rounder, while giving up thos things. Washington can do better as trade facilitator.
So the more I think about it, the bigger the chance becomes the Clippers just stay above the tax indeed.
A team above the first apron can use any TPE that was created after the previous regular season. However, my focus is on non-tax teams that could actually help the Clippers save money.
Tate hasn’t been playing much for Houston. Maybe the Rockets would hold on to Tucker’s contract for use in another deal, but they cannot aggregate it. If not, they buy a pick for saving the Clippers 20M.
The Wizards are 9.8M under the tax so Tucker for Davis doesn’t push them over, so the distribution is still valid. Although the Wizards sacrifice 6.2M in cap space, the actual cash they add is only 2.5M, which LA can pay. And the TPE expires if not used at the deadline. I’m not sure what’s the cause for concern here, outside of the teams not agreeing on draft compensation.
For those who don’t enjoy memorizing numbers, the size of a tax bracket is the same as the amount of the taxpayer MLE.
I think Cle will need to shave 1.5 mill this year to duck the tax.
Not that it be a big tax bill but they gotta keep the dings off the repeater tax moving forward. They are an interesting ledger watch for me as a team that needs to shed while get better with a limited asset base….I think they can do it in the 11th hr of the trade deadline
The odd guy out would likely be Jerome’s 2.56M. They can dump him at the deadline and wait two weeks to sign a replacement, then fill the last roster spot in April. They also have Merrill’s nonguaranteed contract to work with.
Yea lotta different options. I think they can swing Niangs money off with 3 2nds and maybe get back a cheap back end expiring rotation player for this year as well.
It Be real nice to have Niangs money off the books for next year .
I think that be worth 3 2nds from Cleveland’s perspective moving forward. Probably open up that nice 5 mill tax player exception to use next year that seems to have greater buying power today than years past
Is Niang that bad they need to give up three 2nd rounders for him?
With a Niang for Tucker trade, Clippers could get out of the tax. And maybe even get one 2nd rounder.
A third team would obviously be needed to take on PJ Tucker and send back a lower salary player to Cleveland (while getting some 2nd rounders and maybe up to 7.2 million from Cleveland). Cleveland can only take on 7 million in salary (8.5 -1.5). Quite some options I guess.
Clippers would take on 5.5 million in salary (8.5 -3). But it would mean a 8.5 million in salary that can be used for salary matching next year.
The tax and salary benefit would be 3 + 6.5 million luxury tax savings + 15,7 tax distribution.
So it would mean gaining more than 25 million and a 2nd rounder (and possibility to have no repeater tax as of 2027/2028) to have 8.5 million in salary next year, increasing their options for salary matching next year.
Really like the option from a Clippers point of view.
I could even see the Clippers taking on a salary that’s higher than PJ Tuckers 11.5 million. Either a player they find key for next season or a player with salary until end of next season, as long as enough draft capital is added. Just so that it becomes easier to trade for a big name next off season. As their “window” with Kawhi and Harden is closing soon.