United States
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July 11, 2004
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If I won the Lotto South annuity of $ 5 million and purchased a regular house ($ 600 K) in my area, I would keep far more of my money than if I took the winnings in a lump-sum. It would cost me about $50 K in the first year to finance the purchase and pay the real estate taxes, all of which are deductible. Add on the deductions for health insurance, medical savings accounts, property taxes, etc., and I would have about a third of lottery income sheltered from the federal and state income taxes which take out about 38%. If I took the payout as a lump sum, I'd probably have about $ 2.5 million dollars before taxes. After the income taxes hit, I'd be left with about $ 1.5 million because of the higher combined income tax rate of 42%. After purchasing the home with cash, I'd have about $ 900 thousand. With long bonds paying below 4% and stocks yielding 1.7%, I think a more realistic long-term return on the cash would be somewhere around 6 to 7 percent. With no mortgage as a tax shelter and the same deductions as in the annuity example, I would guess that I'd have an adjusted gross of around $ 50 K before the income taxes kicked in.
I think that perhaps your are overcalculating your taxes. When you take the lump sum, federal tax witholding is only 25%. Depending on what state you live in, the state income tax could range from 0% to 9%. Added together, that is still less than the 42% income tax rate you are quoting. DC does not charge state income tax on lottery winnings, so you would only incur the 25% federal witholding.
Now, if you invest your remaining winnings into treasury bonds, you would only pay federal income tax which would range from 15% to 37% depeding upon the amount of interest you earn (no state tax is charged on federal treasury bonds). If you invest in municipal bonds, you will avoid federal income tax and may be able to avoid state and local taxes if you reside in the same state where the bonds were issued. So, you could get totally tax free interest income! The only caveat is that you have to make sure your municipal bonds are not subject to the AMT (alternative minimum tax), but if you stay within the general obligation municipal bonds or similar securities, you will get the triple tax break.
Thanks to the current White House resident, you should also see a decrease in the federal income tax rates and hopefully an elimination of the estate tax (which will benefit your heirs). Perhaps our country will finally eliminate income tax altogether and move to a federal sales tax, so that you are only taxed when you spend money on non-essential items. One can only hope!
As for mortgage interest deductions, the interest penalty overwhelms the tax deduction benefit, so sometimes you are better off being debt free. You have to remember that tax deductions are not the same as tax credits, so deductions just reduce your adjusted gross taxable income.
Don't be so pessimistic about taking a lump sum, there are ways around income tax! Good luck!
One aspect that argues in your favor is that interest rates for money and dividends for bonds are extremely low at present. That means you'll get a large lump sum relative to the annuity value which I think uses the treasury bond rates. If shorter-term interest rates keep rising and longer rates fall, you might do better to gradually invest that lump sum as rates rise than the annuity that's stuck with long-term t-bond rates of around 4 percent.
United States
Member #13,684
April 11, 2005
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Totally a lump sum on a $400 million JP, though I take lump sum no matter the amount. The larger the JP, the more I can make it grow faster than what the annuity would deliver.
Tennessee United States
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October 15, 2004
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Totally a lump sum on a $400 million JP, though I take lump sum no matter the amount. The larger the JP, the more I can make it grow faster than what the annuity would deliver.
United States
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April 11, 2005
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If Jack wins again, maybe it would be a wakeup call to him and he would straighten out. Though I would rather the record breaker be someone who would better use the money for good.
United States
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April 11, 2005
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I would only pick annuity if it was possible for my relatives to "inherit" the annuity.
So I wote lump sum.
Same for me. Plus I've heard a lot of stories about people winning jackpots and being broke in a couple of years. I can't go broke on payments.
A friend of a friend won $54 million in the CA lottery. They took the annuity option. They were always broke, because they spent every last penny. They always had the mentality that another dispersement was coming next year, so they did not manage their money wisely.
I would want the lump sum, because it forces me to manage a finite amount that could likely grow to be more than the annuity sum even with me spending some of it.
Plus, if you invest the lump sum, you can live off the interest earned, so it is kind of like an annuity except that it does not stop after 26 years or less.
Tennessee United States
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October 15, 2004
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after reading all these observations it seems to me that lump sum is the wiser choice unless you really having spending problems then you might want to choose annuity.....