The usual debate is, “Lump sum or annuity payments?” Why not have a lottery that offers both - half paid in lump-sum, half paid by annuity installments over 30+ years?
Let’s move this to IMHO.
Colibri
General Questions Moderator
I put it in GQ because I wanted to know if there was a *legal or regulatory *reason they can’t.
Take the lump sum, and invest it in whatever annuity investment you prefer. That’s what the lottery commission is doing, anyway.
Either take the lump sum and invest half of it in an annuity, or take the annuity and get someone to buy half of it for a lump sum. Still, there is the point that the lottery officials could offer a sliding scale and make you various offers of so much up front and so much over X number of years, but due to the administrative overhead of doing such they wouldn’t pay out quite as much money.
Except that the lottery commission doesn’t have to pay taxes on the money before it buys the annuity. If you took a lump sum payment and invested it in the annuity, you would have to pay taxes on the whole lump sum in the year in which you received it.
I don’t know of any law that specifically prohibits something like this, but if lottery officials offered such an option, they would create a tax headache for any winner who took a multi-year payout.
Specifically, the lottery prizes would no longer qualify for special treatment under Section 451(h) of the Internal Revenue Code. If the prizes no longer qualified any winner would have to pay tax on the WHOLE value of the prize in the year they won it. That would apply to winners who chose the lump-sum, winners who chose the regular 30-year annuity, or winners who chose the half-and-half annuity.
Basically if you won the $1.4 billion jackpot, Uncle Sam would want to collect a few hundred million dollars from you in the year you won it, even if you selected the 30-year payout option. Most people couldn’t afford that.
Even if that were the case, I think all you’d have to do is negotiate for an extended payment plan with the IRS. At worst they put a levy on your winnings and you have to wait a good number of years before you actually collect any of the money you won, but you may well be able to sell that future income stream to someone else in order to get some money now.
… or you could just take a lump sum and not have to do any negotiating. The point of the annuity is to benefit from favorable tax treatment, so anything that results in a levy is rather pointless.
If you think that maximum individual tax rates were going to decline in the future, say to 15% flat tax for everyone, you would be better off to take the annuity. If you believe that tax rates are going to increase, or that you could invest the lump sum proceeds and generate greater than a 4% return, then you would be better off taking the lump sum.