why do many lottery winners choose the cash option. is there a tax break involved here? please explain?

Answer 1

This should be a personal decision based upon the lottery winners individual circumstance. You don't pay any more or less in taxes by taking the lump sum vs the annuity option. If you choose the lump sum option, depending on the dollar amount, a max of 39.6% is withheld for federal taxes. If you choose the annuity option, depending on the annual payment, a max of 39.6% is withheld for federal taxes. The key point in the decision of which opton to choose is if you can beat the investment return of the annuity. If you choose the annuity option the state will find 7 brokers and take bids on zero coupon bonds that go out the length of the annuity period. The state will accept the best offer.A zero-coupon bond pays a certain amount of money when it matures. For instance, in March 2001, you could buy a zero-coupon bond that would be worth $1,000 in 10 years for about $610. The longer the amount time before the bond matures, the less it will cost you today. A bond maturing in 25 years for $1,000 would only cost about $260 today. If you did the math, you'd find out that if you invested the $260 at about 5.7-percent interest, in 25 years it would be worth $1,000. If your lottery winning was 25 million (after taxes) they would buy zero coupon bonds worth 25 million at maturity. So in this scenario,if you could invest wisely enough to exceed 5.7% you would be better off choosing the lump sum option. That would not be very difficult to accomplish in my opinion. I hope that this long winded explanation wasn't too geeky. Good luck

Answer 2

No tax break for cash option in fact the opposite is usually true. All winnings have to be claimed as income for the tax year they are received, but the winner can offset the winnings with proof of gambling losses (ie. non winning lottery tickets, etc.).

The reason most people take the cash option (other than that they are only thinking short term), is that lottery winnings paid out over time (usually 20 years) can not be willed to an heir if the original winner dies. So if an older person wins the lottery, this is usually the main reason they would want to be paid up front.

Answer 3

taxes usually favor the annuity option

the cash option is favored by some for several reasons including:

1. bird in the hand is worth 2 in the bush (or get it while the getting is good)

2. the cash option puts the investing strategy in the hands of the lottery winner instead of the lottery payer, many people think they can invest better and earn a rate better than the one the annuity is based on so that over the same time period they will actually have more money with the lump sum cash option than with the annuity

Answer 4

You will make more money by taking out the entire sum.

lets say you hit for 10 million cash recieved. You take the entire sum in payments over 26 years monthly.

that is 32 thousand dollars a month. Im not willing to do the math about the interest becuase you will understand in a moment why taking the lump sum is good.

if you take the lump sum you get something about 7mil. you will get 42k a year in interest. that is 3.5k a month on interest alone. Over the course of 26 years you will have gotten 1.08 million in interest.

So for the sacrifice of 2 million dollars you will have all the money available to you.

hails,
Silence

Answer 5

In Canada, the government does not tax lottery or gambling winnings. Saskatchewan did tax their lottery winners for a while but they found that lottery tickets sales dropped off significantly as a protest to this that they reverted back to winnings being tax free. But if you're referring to the US where they do indeed tax you, the government isn't going to give up that tax grab any time soon.

Answer 6

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RE:
why do many lottery winners choose the cash option. is there a tax break involved here? please explain?

Answer 7

Those who answered beating the interest rate in which the lottery officials set for the annuity is correct. You take the lump sum because of time value of money. If you can invest properly and beat the return of what the officials set, then you should take it all now.

Answer 8

main reasons would be
1. They think they can get a better return investing themselves.
2. want the money now to use instead of borrowing to pay off with the annuity.
3.If they are older they don't see a benefit of getting a long term payout.

Answer 9

If they take the monthly pay plan the government gets to hold the money. If the cash is chosen THEY get to hold the money, If I got to invest the money I would get the proceeds. If the Gov holds the money the Gov gets the proceeds of investing the money. Show me the money!

Answer 10

If im not mistaken if you dont take the cash option and just the 20million per year for the rest of your life and you die early, you lose the rest of the money. Thats what ive been told.