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New Member
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Jan 16, 2014, 10:25 AM
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Discount rate for lotteries i.e. Powerball
If gross winnings = $10,000,000
if winnings are = $ 9,700,000 after deducting taxes.
If winner takes a lump sum 'up front' payment how much
would the net winnings be discounted... percentage wise
and number of years used in the discounting?
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Uber Member
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Jan 16, 2014, 10:34 AM
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You are aware tax rates vary by jurisdiction?
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Entomology Expert
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Jan 16, 2014, 10:37 AM
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What?
First, your taxes are WAY off....WAY WAY WAY off....No place in the US are they only going to deduct $300,000 from $10 million for taxes.
The rest of it, you will have to probably ask the lottery commission.
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Uber Member
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Jan 16, 2014, 10:41 AM
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Yep... federal taxes alone are 50% on that PLUS any state and local taxes on top of that. I'm guessing this is someones homework question.
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Expert
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Jan 17, 2014, 07:15 AM
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The number of years of discounting and the discount rate depends on the payout plan for the specific lottery - in the case of PowerBall here in the US it's 20 years and 5% discount rate. This works out to a one-time lump sum equivalent payout of about 64% of the stated prize amount. From that they subtract 35% for federal tax plus whatever your local state tax rate is. For example: if the prize is $10M and if your state tax rate is 5% then they would subtract 40% for taxes, leaving you with a lump sum payment of about 60% x 64% x $10M= $3.84M.
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Computer Expert and Renaissance Man
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Jan 17, 2014, 08:50 AM
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Is the discount rate set? It was my impression (and I could be wrong) that this could vary depending on current investment yields. So if annuity rates are lower, it would require more of a lump sum to get the total annualized payout. If investment yields are higher, then it would be less.
Why worry about it now? Wait until you win.
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Uber Member
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Jan 17, 2014, 09:08 AM
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Also.. my understanding while the Anuity pays out more over its life... the payout ends at your death... meaning if something happened to you a month later... it ends and if you had family they would not receive it. But a lump sum once in your hands can be invested and stays with yiour estate to be passed on.
Nobody expects anything to happen to them... but its something to consider.
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Computer Expert and Renaissance Man
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Jan 17, 2014, 09:18 AM
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I would never take the annuity payout for two reasons. One because the annuity might end with my life (though not every lottery has that provision). But more importantly, because I can invest the money at a better return then the lottery commission can.
Lets say, for example a $10M win is payable in 20 $500K installments. Now, I can live on a lot less than $500K. So I would invest part of the lump sum to provide a lifetime income of $100-$150K and then use the rest to invest for the future or for purchases/bills.
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