Winning the Lottery: Taking Installments vs. the Lump Sum

Michael Atias
Director of Tax Services, Instructor

1.5 Billion dollars is on the line in today’s Powerball lottery drawing. The biggest lottery prize ever in world history! Winning the lottery means paying taxes. Should you win the $1.5-billion jackpot and take it in a lump-sum payment, Uncle Sam will quickly relieve you of 25% off the top. Then comes the state for an additional tax of the prize. States like CA, TX and WA on the other hand have a 0% tax on lottery winnings.

Winning the lottery can be a dream come true if you make the right decisions about taxes and investments.

There is still no guarantee that the amounts withheld from your Powerball winnings would satisfy your tax liability. You’d likely owe more to the Internal Revenue Service at the end of the year, given that you will be subject to the highest tax bracket of 39.6%. For Example, if you live in Michigan your net pay after tax is expected to be about $657 Million.

Taking this week’s big jackpot in 30 installments would mean you would get estimated initial payments of $15.9 million and $16.7 million the first year and it would increase by between $1 million and $2 million a year for an estimated total of $1.016 billion, after taxes. While the first chunk of prize money will be charged the current rate, future tax bills may go up or down depending on how lawmakers change the tax code. The bottom line: To maximize the overall value of your Powerball winnings, most financial experts advise taking the lump sum.

Winning the lottery results in you becoming an instant multi-millionaire. Your first move? Call your accountant for good tax advice on how to handle the winnings, minimize your future tax liability and protect your assets. Good luck to all!

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This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.