OT: Powerball

[QuantumMechanic]

If the lottery prize is 1.3 billion (the projected amount when I posted) then the lump sum payout is "only" 460 million? Even living in Taxachusetts that doesn't seem right.

The $1.3 billion (now $1.5 billion) is a bogus number. It is the amount you get if you multiply the annual annuity payment by 30 (since it is a term-certain 30 year annuity). The problem is that $1 in the future is worth less than $1 today.

The actual meaningful number is the estimated lump-sum, which is a good approximation of the net present value of that annuity. The current estimated lump sum is $930mil. The federal income tax on that will basically be a flat 40%. The MA tax will be a flat 5.1% (higher in some states, lower in some states). For rough purposes just say 50% lost to taxes.

So after tax you'll get about $465 mil if you take the lump sum.

 

[Ring 6]

The $1.3 billion (now $1.5 billion) is a bogus number. It is the amount you get if you multiply the annual annuity payment by 30 (since it is a term-certain 30 year annuity). The problem is that $1 in the future is worth less than $1 today.

The actual meaningful number is the estimated lump-sum, which is a good approximation of the net present value of that annuity. The current estimated lump sum is $930mil. The federal income tax on that will basically be a flat 40%. The MA tax will be a flat 5.1% (higher in some states, lower in some states). For rough purposes just say 50% lost to taxes.

So after tax you'll get about $465 mil if you take the lump sum.

Isn't the maximum federal tax bracket 33%?
A single winner would seriously need to consider the 30 year payout.

That would be like winning a 50 million dollar lottery every year for the next 30 years.

Have they changed the rules that if you take the payout and die, your heirs will continue to get it?

 

[Tunescribe]

The $1.3 billion (now $1.5 billion) is a bogus number. It is the amount you get if you multiply the annual annuity payment by 30 (since it is a term-certain 30 year annuity). The problem is that $1 in the future is worth less than $1 today.

The actual meaningful number is the estimated lump-sum, which is a good approximation of the net present value of that annuity. The current estimated lump sum is $930mil. The federal income tax on that will basically be a flat 40%. The MA tax will be a flat 5.1% (higher in some states, lower in some states). For rough purposes just say 50% lost to taxes.

So after tax you'll get about $465 mil if you take the lump sum.

This confuses me. I thought the actual kitty is supposed to be $1.5 billion, yielding a $930 million lump sum AFTER the federal tax is deducted.

 

[Hammer of Thor]

This confuses me. I thought the actual kitty is supposed to be $1.5 billion, yielding a $930 million lump sum AFTER the federal tax is deducted.

No. The annuity payments total 1.5B. If you take it today it's $930M. This is the present value of that annuity stream - it takes into account the fact that a dollar today is worth more than a dollar tomorrow.

Similar idea to your mortgage - you may have borrowed $200k, but over 30 years you will have actually paid $360k to pay it off.

 

[QuantumMechanic]

Isn't the maximum federal tax bracket 33%?
A single winner would seriously need to consider the 30 year payout.

That would be like winning a 50 million dollar lottery every year for the next 30 years.

Have they changed the rules that if you take the payout and die, your heirs will continue to get it?

No. The max federal tax bracket is 39.6% and it kicks in at $415,050 of taxable income for singles and $466,950 of taxable income for married filing jointly.

Whether you are getting the $50mil/yr annuity or the $930mil lump sum, the start of the 39.6% bracket is so low compared to those amounts you will essentially be paying a 39.6% (call it 40%) flat federal income tax on it. So tax-wise you save nothing from taking the annuity.

And since I expect the fiscal situation of the US to deteriorate going forward, I expect the top bracket rate to rise, perhaps significantly. I certainly can't see it going down. So I would absolutely take the lump sum so I can "lock in" my tax cost.

If you take the annuity option it is term-certain. The payments last for 30 years whether or not you do.

 

[Palm Beach Pats Fan]

...The MA tax will be a flat 5.1% (higher in some states, lower in some states)...

idea...

I live in Florida, a no income tax state. So, if any of you win the lottery, we'll say that I bought the ticket, I'll take 4%, then you'll get the rest (after the other taxes)!

You get more money that way, since you'd pay me 4% instead of paying the state 5.1%.

That's just the sort of good friend that I am!

 

[QuantumMechanic]

idea...

I live in Florida, a no income tax state. So, if any of you win the lottery, we'll say that I bought the ticket, I'll take 4%, then you'll get the rest (after the other taxes)!

You get more money that way, since you'd pay me 4% instead of paying the state 5.1%.

That's just the sort of good friend that I am!

Don't think that'd work. MA knows the ticket was purchased in MA and I bet some provision of state law says that income from a lottery ticket sold in MA is taxable by MA even if the purchaser was not a resident of MA. (There are a bunch of things like that -- if you are a non-resident of MA but sell real estate located in MA then the gain is taxable by MA, for example.)

 

[Palm Beach Pats Fan]

Of the 43 states that participate in multistate lotteries, only Arizona and Maryland tax the winnings of nonresidents.

Do I Have to Pay State Taxes on Lottery Winnings if I Don't Live in That State?


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