No. of Recommendations: 5 Dr. Clayton Forrester (MST3K) liked to say..."every party needs its pooper"...So allow me to be the party-pooper on mega-winnings.

The advertised amount of the mega-millions/Mega Jackpot/Powerball/whatevername multi-state lotteries winnings is typically at 3 times the size of what the winner will actually end up with. Here's an example:

Advertised winnings: $1,500,000,000 ($1.5B)

50% goes to the states (lump sum option), leaving $750,000,000

Fed tax, at this level, will be 36.99% Fed tax, as the total of deductions for the average household will be a tiny, tiny fraction of 1% of the winnings and the amount taxed in the 10% to 35% brackets amounts to about .02% of the winnings being taxed. Thus, leaving, rounded, $472,500,000. Note, the Feds withhold 24% by law, but clearly this is just under 13% short of what the actual tax will be. The media ALWAYS says this wrong....they say "after paying the state and taxes...". 24% is NOT the Fed and possibly State tax due on the winnings.

State tax, unless the winnings are in one of the no-state tax states or CA or DE (do not tax lotto winnings), must be paid. So for one who wins in NY, the state tax on lotto winnings is 8.82%, leaving about $430,825,000.

This means the actual take home in NY of $430,825,000 is 28.7% of the quoted winnings and not even close to the advertised $1.5B that was printed out on the over-sized check and held up so all the media cameras could get it for prime time.

Every time I explain this, I'm hit with a boisterous "Well Break my heart!!! Who's complaining??!! You still get $430,825,000" or some other equivalent words of disbelief of my stupidity. This loud response demonstrates why the multi-state lotto system works. By organizing as a multi-state lotto, the total of ticket purchases will be much, much greater than any single state could do, which makes the "winnings" an incomprehensibly large number to just about any winner that doesn't have the assets of Bill Gates or his equivalent. So to the average work-a-day or retired Joe out there, $430 Million is the same size as $1.5B....they are simply too big for the average person to distinguish in their own bank account. For conceptual purposes, they are the same number.

To test this theory, go back and redo the winnings but make the proclaimed winnings $1,000 from the multi-state lottery to a NY resident...a number well within the average persons sense of financial reality. Of course, all the %'s would change, but let's hold them constant for this example. So the announcement is made, confetti is thrown, news people swoon and ask what the winner will do with his new found wealth, cameras are there, much jubilation and so on. Then after everything as settled down, the lotto winner goes to the lotto office and is handed a check for $287 (let's say the lotto actually paid the winners state and Fed tax). What do you think the winner would say? How about...."HEY...WHERE'S MY $1,000!?!?!? THIS IS A RIP-OFF!!! I'VE BEEN CHEATED!!! YOU LIED TO ME!!! Followed by other unfriendly and nasty language. The average Joe knows the difference between $1,000 and $287, but not the difference between $430.8MM and $1.5B.

And yes, most winners take the lump sum. But unless the winner lives in AZ or MD (taxes out of state winners) but lives in a state that otherwise taxes the lotto winnings, it would probably be better to take the 29 year annuity payments and in the second year, relocate to a state with no state tax. For NY, the first year of 29 year graduated annuity (increases each year) rate of 5%/yr would provide about $10MM the first year using the above figures, then move to, say, TX. This would save about $65.6MM in state tax over the next 30 years.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.