BreitLight wrote:
Nah, it's just a common misconception.
They advertise the jackpot as $640 million, right? However, in order to really get that $640 million, you have to take the 26 year plan. With that said, it's never $640 million...because there are taxes. However, everyone thinks that they can get a lump sum of $640m minus taxes. They fail to understand that the cash option is much less.
So, with that said, cash option less taxes equates to, almost, 50% of the JACKPOT (640m). However, that doesn't mean taxes are 50%. It just means they're comparing taxes on the cash lump sum to the "jackpot" amount.
This really is simple.
Traditionally lotteries paid out in 20 or 25 year annuities, which means they purchased a a stream of payments by paying a premium. Now they give the option of taking the amount they would pay for the annuity premium, which varies according to the interest rate - the lower interest rates are, the higher the annuity premium. The higher interest is, the lower the annuity premium to produce the same benefit stream. Currently, the price of an 25 year annuity is about 52% of the total of the stream of payments. Whatever it is, that is what you get.
To make it easier, if the jackpot is $100 mil and the cost of the annuity is 50% like it was a year or so ago, you win $50 mil. EVERY single penny of that is regular income subject to the same income tax rates all other non-capital gains are. The 25% is simply amount of WITHHOLDING. Other lotteries withhold 15% Federal. Not much different than hitting a $10k slot in Vegas - the IRS gets withholding before you leave and blow it on a watch. If you won, $330 mil, it would take some good tax work not to owe more than 25% to the Feds.