If you won $100,000,000, and had the option of a lump sum or annuity payments, which would be better for tax.?

purposes?

Since winnings are taxed as ordinary income, would it matter how you elected to receive it? Would it be better to go with the current tax rate for that much money, or take a gamble on the top rate being lowered some years down the road? Because the top marginal rate is going to be at least 39.6% starting in 2011 (not sure how many years it will be in effect). But the top rate now is 35% on income that is over $373,650, plus $108,421.25.

So I figured that amount would come to $34,869,222.50 $108,421.25=$34,977,643.75.

And SS tax is 6.2% on the first $106,800 ($6,621.60) and Medicare tax is 1.45% (1,450,000).

That comes to about $36,434,265.35 not including state tax (if the its paid in that state).

That's about 36% total. My numbers may be off, but just assuming you could walk away with a little over $60,000,000 right now, would it be better to take that or (let's assume) $5,000,000 (pre-tax) for 20 years?

the lottery winnings are not taxed as wages, there will be no SS or Medicare
it probably will not matter since the amount you would take is probably always going to be at the highest rate, regardless if you pay for all of it now, or pay as you take it over a period of years
if you pay all of it now, the left over money invested might earn more over the years and then again pay annually on the interest, etc
however taking annually, less would be available to invest and less to earn and pay taxes on

1-you don't pay FICA taxes on lottery winning - only on "EARNED INCOME form a job
2-the lump sum % may differ depending on which lottery you win - not all lotteries use the exact same formulas or # of annuity payments
3- you have to do present value calculations of the annuity payments,a nd try and estimate inflation to see if that way is better or not
4-if the lottery total is $100 million - you only get $100 million if you choose the annual payments ($4mill a yr for 25 yrs or whatever) - if you choose lump sum - you might only get HALF of that BEFORE taxes

This is an individual choice. Anybody who wins a big jackpot should consult with a financial planner before making their decision.

Lump sum.
Otherwise you are trusting that the person that owes you the money will to go bankrupt.

Ex: Win the california state lottery.
Note that they can't even pay back state tax returns.
Would you trust your state to pay you money for the next 20 years when so many states are going bankrupt? Lottery winning payouts are last in line.
/

I would take the annuity certain over a lump sum. But not for tax reasons.

If you take a lump sum, they only pay you the present value of the annuity certain. At today's interest rates, that's around half of the gross amount. Since you are getting a discounted payout up front on the lump sum, inflation is largely a wash. In fact, if the 20-year rolling averages on inflation hold true, and there's little reason to think that they won't, you may even come out a bit ahead with the annuity certain.

From a tax perspective the savings will be minimal with the annuity certain. Taking the annuity does shift more of the income each year into lower brackets, but with a win that large you'll be looking at the difference in net rates of between 34.2% and 34.5%. That does assume that rates stay static at their current levels of course, which is unlikely given the status of the deficits, but there's no way to accurately predict future tax rates. Assuming that you took the lump sum and invested it wisely you'd still be hit with the increased taxes on the future income that it generated. Another wash on taxes.

None of that would influence my decision significantly though. What my decision is based upon is what happens to most people who have a win that large and who take the lump sum. Most of them wind up broke and bankrupt in a few years. With the annuity certain the odds of that are greatly reduced.

Many lump-sum winners give away a lot of their winnings to friends and family, blissfully unaware of the gift tax consequences of doing so. More than one has given away more than half of their winnings, only to be slammed by the IRS for every remaining penny. Gift taxes run as high as 55%. It does not take a mathematical genius to figure out that if you give away half, you won't be able to pay the tax bill with the remaining funds. Some folks who took the annuity certain did run into financial trouble in the first year or two, but learned from their mistakes while they could still afford to get back on an even keel and did quite well in the out years.

The claim that you are depending upon the state to stay solvent in order to collect the annuity certain is pure FUD from someone with no financial savvy. The annuity is not paid directly by the state, but with proceeds from an actual annuity contract purchased from a highly-rated commercial insurance company. Many states now break the contracts up among several carriers as a hedge against one carrier going bust as AIG nearly did. For you to lose out would require that all of the insurance companies AND the state all became insolvent. If things ever get THAT bad, the guy who took the lump sum is probably going to be as broke as you are, even if he invested it wisely. And contrary to what that respondent claims, no state has gone bankrupt since the Civil War. A few cities have in the past 50 years, most notably New York and Miami, but no states have.

Note: Social Security taxes only apply to earned income. You would not pay any FICA taxes on a lottery win, regardless of how you took the payout.

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