# Tax Burden on US\$254 Million?

So as well have heard by now, little old man, the 84 year-old James Wilson of Missouri won US\$254 million in the power ball. Good for him. He has hired an ex-IRS guy to help him with the implications.

I presume given his age, he will take a lump-sum pay-out.

(I note that he and his three children are already claiming to have had an agreement to share all winnings, let’s ignore that.)

OK, so what would be the likely tax paid on this huge amount? I always guess about a third, leaving 424 million. Anyone have a more exact figure?

I assume you realize your math is off, as \$424 million is more than \$254 million.

That being said, the cash payout on \$254 million is \$120,508,183 million. The tax on that amount for married filing jointly is \$42,157,724. Your final cash payout after taxes is \$78,013,909. This assumes a straight tax on the amount, not including any investment deductions or shelters that might lower the tax.

Presumably the state will then want their cut as well.

Good point, though some states assess no tax on lottery winnings (Delaware, New Hampshire, Pennsylvania, South Dakota, Tennessee and Washington, D.C). Subtract another 4% (\$4,820,327) for the state of Missouri; now your take home is only \$73,193,582.

That is to say 254 million, if taken over 20 years, but only 120 million if taken as a lump sum?

I hate taxes.

Hey! Wait a cotton-picken minute! If he claimed he and his three sons had a long-standing agreement to play the powerball as a group, then the pay-out (however taken) would be granted one personal exemption for each of the four, lowering the total tax load?

Further, if we presume that Mr. Wilson is looking ahead to transferring his loot to his sons after his death, then the amount would be taxed only once under this circumstance? (Instead of once as income to Mr. Wilson, once again as inheritance to the sons.)

The tax implications could be quite large. Claiming to have been playing as a group (no matter how tissue-thin the claim is) could save the sons a ton of money.

Wow.

That discrepancy is NOT due to taxes. The taxes would be paid on the \$120 million.

The difference between the 254 million and the 120 million is essentially based on the difference between an annuity over 20years, and a lump sum.

So, if you wanted to buy an annuity that would pay out about \$12.52 million a year over 20 years (for a total of \$254 million), the current price for that would be about \$120 million.

I’m sure that most winners don’t complain very much, but the way they advertise lottery winnings is, in my opinion, extremely deceptive. What other product or service advertises its value based on depreciating money that won’t actually be paid out for up to 20 years?

It’s like if you borrowed \$20 from me, and i told you that i’d pay you back at \$1 a year over 20 years. Sure, i’m giving you back \$20, but it’s not worth the same as \$20 was when you loaned it to me. I think that, when advertising the amount of the lottery prize, they should have to advertise the lump sum amount.

Of course, as i said, if i won the “\$250 million” lottery, i would complain too muuch about the \$75 million cash after tax.

Not really much of a saving at all.

The maximum income tax rate kicks in before \$100,000, so the total tax on \$120 million (for one person) and on, say, \$30 million each for four people, wouldn’t actually be much different.

“Present Value of Money” and all that.

OK, so now that that is settled, it only remains to be seen how much a lair under a volcano costs. I must have enough left over for the sharks with freakin’ lasers on their heads.

Splitting the winnings among four people isn’t where the tax savings would come from. The savings come from this scenario, where tax is paid only once on the money:

Four people share the winnings, and pay tax as ordinary income at the highest rate. This would require a little fancy footwork, where the family says after the fact that, “Oh, yeah, we all chipped in and agreed to split the winnings. That’s the ticket.”

vs. this scenario where it’s paid twice:

Dad gets the winnings, and pays tax as ordinary income at the highest rate. Then he gives his children each a share of the winnings as a gift and becomes liable for gift tax on the amount over \$12,000 per child per year.

vs. this scenario where it’s paid twice:

Dad gets the winnings, and pays tax as ordinary income at the highest rate. Then he dies, and his estate pays estate taxes on the amount over \$2 million that passes to his children.

At \$349,700 actually. It still doesn’t make much difference on a single payout, but it becomes an argument in favor of the annual payout - lower taxes on the first million every year.

my question becomes after the initial tax payment…

in the years to come… is there more taxes due on the 75 mil? If I put it in my mattress and lived comfortably, never earnng a dime, only spending, would I be able to never file taxes again?

Wow. I didn’t know the top tax bracket kicked in at such a high amount. Learn something every day. In case anyone as wondering, the top tax bracket isn’t something i have to worry too much about on April 15.

As for your argument about lower tax each year, that’s true. But you’ve got to decide whether you could offset that by taking the cash and making investments that yield a better return than a regular annuity. If you could, for example, get even 10% per year on your lump sum, i think that would more than make up for the increased tax burden.

Yup - I only said an argument. Personally, I would take the money and run. Or, rather, sail into the sunset. Not that it is a likely occurrence, never having bought a lottery ticket…

If my calculations are correct, \$254m is about the same as \$120m invested at 10% and drawn down in 20 equal annual sums.

The federal government does not tax assets, so you’ve got it in one.

I think some states do tax assets, they’d take a piece every year.

But the state has the advantage of investing the whole \$120 million, whereas the person who takes the lump sum can only invest \$73 million, so you are \$47 million in the hole right off the bat. Subtract the interest on that missing principal, and you would have to be pretty shrewd with some higher risk investments to get ahead out of that hole.

But of course, you can’t literally put 75 million in paper money under your mattress. What you really do is put it in the bank, where you’ll get 2% interest on that 75 million. And you’ll have to pay taxes on your 1.5 million interest income every year. Of course you could easily do better than the 2% savings account interest if you bought completely safe bonds and such. If you think putting money in the bank or buying bonds is too risky, think about the risk of robbery or the bills getting eaten by rats if you try to put paper money in a vault somewhere. And if the government defaults on those bonds, your paper money is going to be pretty worthless as well.

Why not? I just glanced at some notes in my wallet and it seems if they were new they’d stack up to ~ 4" or so per 1000. Even given a generous 6"x3" per bill I think you’d be able to fit \$75 mil inside a king sized box spring.

Grandad falls asleep with lit cigarette: 75 million up in smoke.

Hurricane or tornado blows house away: 75 million (in)voluntarily shared with the neighbors.

Rats/Mice/Squirrels making nest in mattress: creates funny smelling, and expensive, confetti.

Well meaning wife/kids buy you a new mattress, and donate old one to Salvation Army (assuming you told noone where you hid your loot): Earlier than expected coronary.

If you are asking if it’s possible to store 75,000 \$1000 dollar bills in that space, I would guess you could. But the point was, it’s not too safe to do so, just to avoid paying taxes on the interest earned from it.

Yes, but you literally can. Saying “But of course, you can’t literally…” implied that you can only do so metaphorically, by say putting it in a single savings account (which is about as stupid as having it as cash under your mattress).

California doesn’t assess income tax for lottery winnings either.
A good rule of thumb for lump sum payouts is that you will receive app. 1/3 of the total jackpot after taxes.