If a vacationing Canadian buys a lottery ticket, they pay US income tax on any winnings. You’re not liable for US income tax because you’re a citizen of the US, you’re liable because you recieved income in the US. If you were a Canadian who gets a job in the US you have to pay US taxes on your salary, yes?
In the short term, yes, but the withheld taxes on lottery winnings are refundable, according to my research.
When you choose the yearly payout on a lottery, the lottery actually buys an annuity for you and pays you from that annuity. You can do the exact same thing yourself with your lump sum payment and you should get similar results.
The real reason to take the lump sum (assuming the lottery hasn’t created a real incentive to take one over the other on a present value basis) is so that you can buy a smaller annuity (say $1 million/year for the next 30 years for say $25 million or something like that) and have $40 million left over to invest or spend as you please.
You cant get around paying the tax on the original winning amount. You can avoid the tax on income earned on the after tax amount. Expatriation tax - Wikipedia
So if you took the lump sum, you are only going to get the after tax lump sum amount but you can expatriate so that any interest you earn on that amount will not be subject to US taxation (of course you cannot spend more than a month in the USA per year for the next 10 years).
If you took the annuity amount, I think you can defer your taxes until you got the annuity payments, so (I think) you would get some time value by paying your taxes later.
I think this is because the kind of people who invest heavily in lottery tickets are, by and large, they kind of people who aren’t into prudent money management.
I think here in Virginia they pay out 50% of the gross, in theory. So the $100 million powerball jackpot represents $200 million in tickets sold. Check my math:
VA sells $200 million in lottery tickets.
The winner can choose to get 3.5% of the jackpot for 30 years or he can take $65 million. So, he only really won $65 million. The $100 million is pure illusion. What a scam.
A lot depends on interest rates. Basically, if you take the annuity, you are loaning Virginia your $65 million for 30 years at about 5% interest, then they keep the whole thing at the end! If you can make that 5% or so on the money I would say the lump is better because you get the principle at the end.
If it is a scam, it is a very poorly kept secret. The cash value is displayed right at thetop of the PowerBallwebsite, right under the jackpot value. I don’t think it is any secret that the jackpot value is the sum of the 20 year annuity.
First, thank-you J Cubed for the mention and link to my blog article above.
Yes, I very much advocate that people who win the lottery take the annuity. I, like many others, originally believed the cash was better. But, after I laid out the cash flows, deducted the taxes, and tried to duplicate the annualized payments, I realized that a conservative investor (like myself) could not replicate the lotteries offerings.
Also, I thought about the folks I know who have become financial planners (wealth managers). Many are either kids right out of school, or others who have switched professions because the economy is bad. Neither of these groups has much to offer except by promoting their companies research.
While some can say they don’t trust the states with the investment, the lottery by-laws typically require that sufficient money be invested in US Treasury Strips (the only allowed investment security) in order to guarantee the annuity payment. So, if the government goes belly up (a possibility these days), you lose your money - otherwise you win. Even if the state goes bankrupt, you’ll get your money. And, if you die, the payments go to your estate.
Those are only a few reasons I advocate the annuity. Thanks again to all for the mention and for reading my blog article! JL …
In the OP’s hypothetical example, from a pure financial perspective it’s really just a question of what rate of return you can earn on the lump sum versus the implicit return built into the annuity payments (which comes to 3.42%). Sure, the OP might expect to earn north of 3.4% in the stock market - but this is a poor comparison since we’re comparing a risk-free option (the annuity, which is backed by treasury bonds) to a risky one. Given that 30 year treasuries currently yield 3.01%, the annuity appears to be the better option.
Especially in light of the stock market of the last four years. We still haven’t recovered to the Oct 2007 level, so that’s over four years of lost earnings. Willing to bet we won’t have another recession in the next 20 years?
From a purely investment view, and not considering anything else, your approach makes sense. I will still take the lump sum. I can manage my money. And if I decide to bury the lump sum in the back yard the alleged “lost income” really means squat to me. That’s because the lump sum, tied in with the actuarial tables of approximately the life expectancy until my demise means a yearly spending pattern on a gargantuan scale to my current spending habits. As I said, I can manage my money. OK, minus the outlay for a fully paid house and other niceties that I may initially indulge, and I will still have a gargantuan-1 amount that will last me the rest of my life.
YMMV. Mine is a lump sum. A bird in the hand and all that.
This reminds me of the Polish lottery. One million dollars, paid as one dollar per year, for a million years.
Would it have to be an either/or situation or could you split the lump sum and annuity as percentages of the total winnings?
Your friend is correct. Take the lump sum. No one knows what tomorrow brings, but betting on inflation is a good bet. Each future payment is worth less than the last, even if they graduate the payments up because the annuity company can’t predict how much money the Fed will print.
Also you don’t know if you will be around to collect the final payments or if the entity making future payments will be solvent. A bird in the hand is worth more in the bush.
Some types of annuities are great tools for some. But immediate annuities for lottery winners are usually not.
On a final note, I speak from experience on this. My ex wife won California’s super lotto. 6 of 6 on a quick pick. Every December we received more than 120K in the mailbox. (Back then the annual payments were the only way you could get your winnings.) Last payment came two years ago. Today she is broke. There is the mindset some get from these payments that they will always be there. Sadly the day comes when no check arrives.
Several facts to also consider:
[ul]
[li]Cash Value of Jackpot[/li][li]Length of annuity payout[/li][/ul]
The current low interest rates result in both lotteries (Mega Millions and Powerball) offering cash value (lump sum) payouts that range from 65-75% of the lottery jackpot. 5 years ago, when interest rates were much higher, the lump sum cash value was much lower since the state required less principle to purchase the annuity. The current Powerball jackpot is 110 million and the cash value (lump sum) is 71.9 million. You still have to pay taxes on the winnings so the actual after tax payout is reduced by another 28-35%.
Powerball pays the annuity over 30 years and Mega Millions over 26 years. You would get a higher annual payout winning Mega Millions.
Somewhat related question - Can lottery winners remain anonymous or can they claim the prize through an attorney thus avoiding disclosure of their identity?
personally, I would be taking the lump sum. I haven’t done the math, but on gut feel it should work out better having the money in hand.
But more to the point - does anyone else find it pure insanity that gambling gains are taxed? Are there any other countries beside America that do that ?
Sweden’s lottery winnings are tax-free.
Basing this on what would happen to the stock market is kind of oversimplifying. Who invests all their money in stocks? What about real estate, government bonds, art, antiques, etc.? Diversify yo’ portfolio, and whatnot.
I’d take the lump sum. I might want to do something interesting with 5 or 10 million of it, right up front. Not all, or even most of it, but maybe 5 or 10 million.
I am also smart enough with money to avoid excessively risky investments, and smart enough to diversify well. A little Costa Rican beachfront real estate (it appreciates FAST in the better areas), a little South Florida real estate (it’s cheap now, but it’s already going back up), a few thousand shares here and there of solid companies that pay good dividends (in different industries), some fine antiques/art that appreciate in value well, some T-bills, etc…
Also, you may want to create a family trust to avoid the estate tax. You probably also want to put a sizable chunk of your assets in untouchable sources overseas, like OJ Simpson did, in case you are successfully sued, like he was.
I can definitely understand why some people should choose the annuity, though. Most Americans just don’t have the good sense to invest/spend intelligently. The proof of that is the fact that so many lottery winners go bankrupt.
[quote=“aruvqan, post:6, topic:610945”]
I always thought it would be fun to take lump sum and put it into a non interest bearing account. Rationale: The government taxes you on it when you get it. Then they will tax any interest that it earns every year. They can not tax you on an income that does not exist. No interest, no income. You then do not pay an income tax to anybody ever again, however you do pay the taxes on property so you are best not buying the expensive toys - ultra sports cars, big boats, huge houses. So if you stay with sensible cars, moderate toys, moderate house and maybe a vacation property you can basically screw the government out of money. [I would also take a certain amount in cash and stash it in a well hidden safe in the house and not let anybody know that it is there.]QUOTE]
By all means, pass up the chance to earn X amount of interest on your money, so that you don’t have to pay 30% of X to the government each year. That’ll show them!
No, I don’t think it is insane at all. Quite the opposite. Why should income from hard work be taxed, but income from pure, blind luck be considered too special to question? Plus, if one is part of that small profession of professional gamblers, why should they get to live income tax-free, while plumbers, accountants, and professional football players live under a normal tax code?
Now, I know that some states do not tax lottery winnings. Well, whoop-dee-do. I don’t understand why a lottery winner who gets, say, $100 million in found money should be upset that the state they live in gets its cut of $10 million or so. What, $90 million (minus the Fed’s take) isn’t sufficient for you?
But to the larger question, I don’t consider it an automatic decision on whether to take the cash or the annuity. Just because I can manage a small office doesn’t mean I could manage a Fortune 500 company; just because I can manage my current budget doesn’t make me qualified to manage a portfolio of nine figures. If I won, I’d consult finance professionals first, evaluate their advice, and make a decision. There’s certainly a minor tax benefit for taking an annuity, for example, but I couldn’t calculate on the back of an envelope how much that really adds up to.
I want Mr Drysdale to manage my money.
Pesse (Anyone good enuf for Jed is good enuf for me.) Mist