Hoops Rumors

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 2026/27, the league’s salary cap is set at $164,961,000, so the luxury tax threshold is $200,428,000. That means any team whose total ’26/27 salary exceeds $200,428,000 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 first year of the current Collective Bargaining Agreement, 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 each subsequent season, the size of those tax brackets has increased at the same rate as the salary cap. In 2024/25, each tax bracket was $5,168,000; in ’25/26, that figure increased to $5,685,000; and in ’26/27, it’s up to $6,064,000.

Here’s what the standard luxury penalties will look like in 2026/27:

For each additional $6,064,000 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 $5.25 per dollar between $24,256,001 and $30,320,000, $5.75 per dollar between $30,320,001 and $36,384,000, and so on.

Here’s a practical example of how the tax penalties work. The Thunder currently have a team salary of $214,279,492, which is above this season’s tax line by $13,851,492, putting them in the third tax bracket. Oklahoma City’s total salary will likely move up or down before the end of the 2026/27 season, but the team’s current projected tax bill is $19,676,219. That’s based on a penalty of $6,064,000 from the first tax bracket, $7,580,000 from the second, and $6,032,219 from the third (a penalty of $3.50 per dollar on $1,723,491).

The standard rates listed above apply to most taxpayers, including seven of the 11 teams currently operating over the tax line for 2026/27: the Thunder, Knicks, Magic, Timberwolves, Sixers, Pacers, and Kings.

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 criteria currently applies to four teams — the Nuggets, Warriors, Lakers, and Suns paid the tax at least three times from 2023 to 2026, which means they’ll be subject to repeater rates if they finish the 2026/27 season in the tax.

Here are the penalties that apply to repeat taxpayers in 2026/27:

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 $7.25 per dollar; that would increase to $7.75 per dollar in the sixth tax bracket, and so on.

The Lakers are currently carrying $200,897,322 in total salary, surpassing the tax line by a mere $469,322. If they were a standard taxpayer, their penalty would be just $469,322, but since they’re charged $3 per dollar as a repeater taxpayer, their projected tax bill is $1,407,966.

The further into tax territory a team goes, the greater the difference between the repeater rate and the standard rate becomes. For instance, while the Nuggets’ roster isn’t yet complete, their projected tax bill at the moment based on their 13 standard contracts is $68,407,111. If they weren’t subject to repeater penalties, it would be just $33,057,622.

In their most recent Collective Bargaining Agreement, the NBA and the National Basketball Players Association agreed to adjust the tax rates. The current CBA reduces the penalties for standard taxpayers who are operating in one of the first two tax brackets. However, the penalties for operating in the third bracket or higher have increased, and the tax rates for repeat taxpayers have become more punitive in every bracket.

The goal of these tweaks is to discourage teams from soaring way beyond the luxury tax line – and operating over the tax indefinitely – 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. In 2025/26, for example, 14 teams were operating over the tax in January, but half of those clubs ducked below the tax line as a result of their trade deadline activity, leaving just seven total taxpayers by season’s end.

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 $100MM 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 explained 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.