Man wins lottery on the day he becomes US citizen

[AdamSnow]

Originally posted by: Crono

Originally posted by: mercanucaribe
Who's stupid for wasting money on lottery tickets now?

Everyone who didn't win.

:laugh: very true!

 

[dullard]

Originally posted by: HumblePie
ouch, 25 x 52,920 = 1,323,000

So while he won 1.89 mil he has $567,000 in taxes? Does that seem a little high or insane to anyone else? That looks frikkin crazy!

That is 30% removed for federal + Iowa taxes. 30% really isn't that bad. And if he stops working now, the federal tax rate will be 15%. Iowa tax rate is <8%, it sure probably isn't another 15%. So, he'll get money back each year when he files his taxes.

 

[rh71]

Originally posted by: dullard

Originally posted by: techs
Bittok chose to receive his winnings in 25 annual payments of about $52,920 after taxes

Foreigner mistake.

Plus tax on $50k a year is 15% for a married couple, far less than the 35% tax rate on $1.89 million in one year.

I just did the calculation and by taking the annual payoffs, he's only losing out on $2mil after taxes (after 25 years) by those tax figures above.

But yes, he could've invested the lump sum...

 

[Shadowknight]

Originally posted by: dullard

Originally posted by: techs
Bittok chose to receive his winnings in 25 annual payments of about $52,920 after taxes

Foreigner mistake.

Nope, good sound logic to take the annual payments. A large percentage of lottery winners go bankrupt later in life. Why? Since they overspend, get hooked on the spending, and cannot stop. It is just human nature. This way he will have money for life and never have any worries. He can't overspend since he doesn't have it. He can't be hit up by friends/relatives begging for cash since he doesn't have it. Plus tax on $50k a year is 15% for a married couple, far less than the 35% tax rate on $1.89 million in one year.

In an ideal world, it may have been better to get the lump sum. But not in the real world (for most people).

Except some lottery winners have taken the multiple payments and still become bankrupt. Why? There are agencies which will loan lottery wnners money in return for fixed payments. They still blow through the whole thing in a short time, and wind up owing the future amount plus interest. In some cases, they blow through their winnings the receive as well as the loan as well.

Originally posted by: DivideByZero WWYBYWB

This is the second time someone has asked me that. I finally got around to searching for that term and you're asking me who I was before I was banned? This is my first and only Anandtech account. I'm ripping off one of the typical responses to threads posted. So sue me.

 

[dullard]

Originally posted by: rh71
I just did the calculation and by taking the annual payoffs, he's only losing out on $2mil after taxes (after 25 years) by those tax figures above.

But yes, he could've invested the lump sum...

Lets do the calculations online for everyone to see.

I assume:
1) He and his wife quit work and live off the proceeds.
2) He and his wife spend $61500 a year. To keep the math simple, they spend it once a year on day 1 of the year.
3) Income tax brackets don't change over the next 25 years (federal and Iowa).
4) $10,000 tax deduction is taken a year (basically the standard deduction for married couples).
5) Average of 6% return on investment. Most people will agree with this number. We aren't seeing the 10% return anymore. I could redo it with 10% if I must.
6) Lump sum payment is 50% of the total annual payment (this is pretty standard for lottery winnings). If you know the exact Hot Lotto number, I can use it.
7) He and his wife currently have nothing. No debt, no assets.

Lots of assumptions, yes. But none are too unreasonable considering we don't know what will happen to those numbers.

Annual payments
Annual payments: $76500/year.
Federal tax (I was wrong in my post above, he is just into the 25% bracket): $9730/year.
Iowa tax: $4371/year.
Net: $61499/year.
After his spending, he has $0 each year. So no interest is earned.
Total post tax payments: $61499*25 = $1.53 million.

Lump sum payment
Year one payment of $1.89 million/2 = $945,000.
Year 1 fed tax: $402,812.
Year 1 state tax: $82443.
Net earnings: $459,744
Spend $61500, so he has $398,244 left to earn interest.
Interest payment is $23,894.

Year 2: pays tax on that interest.
Year 2 fed tax: $1389
Year 2 state tax: $513.
Year 2 interest: $20,924.
Investment balance changes by -$1389 -$513 - $61,500 +$20,924.
Notice how this investment is dwindling?
Repeat each year.

Balances each year:
Year 2: $348,736
Year 3: $296,729
Year 4: $242,055
Year 5: $184,502
Year 6: $123,886
Year 7: $59,819
Year 8: -$8091 When spending $61,500/year, the lump sum payment is gone at the end if the 8th year!
Total post tax payments including interest: $0.55 million. He gets 1/3rd of what he would have gotten by taking annual payments in this scenerio.

Yes I admit timing of the tax payments and timing of the $61,500 payments will affect the numbers. But for a rough calculation, it is stunning how wrong some people can be to take the lump payment.

Edit: I just redid the calcs. At 10% interest, he runs out in year #9. He gets a total of $0.64 million. Still far less than the annual payments.

 

[techs]

Originally posted by: dullard

Originally posted by: rh71
I just did the calculation and by taking the annual payoffs, he's only losing out on $2mil after taxes (after 25 years) by those tax figures above.

But yes, he could've invested the lump sum...

Lets do the calculations online for everyone to see.

I assume:
1) He and his wife quit work and live off the proceeds.
2) He and his wife spend $61500 a year. To keep the math simple, they spend it once a year on day 1 of the year.
3) Income tax brackets don't change over the next 25 years (federal and Iowa).
4) $10,000 tax deduction is taken a year (basically the standard deduction for married couples).
5) Average of 6% return on investment. Most people will agree with this number. We aren't seeing the 10% return anymore. I could redo it with 10% if I must.
6) Lump sum payment is 50% of the total annual payment (this is pretty standard for lottery winnings). If you know the exact Hot Lotto number, I can use it.
7) He and his wife currently have nothing. No debt, no assets.

Lots of assumptions, yes. But none are too unreasonable considering we don't know what will happen to those numbers.

Annual payments
Annual payments: $76500/year.
Federal tax (I was wrong in my post above, he is just into the 25% bracket): $9730/year.
Iowa tax: $4371/year.
Net: $61499/year.
After his spending, he has $0 each year. So no interest is earned.
Total post tax payments: $61499*25 = $1.53 million.

Lump sum payment
Year one payment of $1.89 million/2 = $945,000.
Year 1 fed tax: $402,812.
Year 1 state tax: $82443.
Net earnings: $459,744
Spend $61500, so he has $398,244 left to earn interest.
Interest payment is $23,894.

Year 2: pays tax on that interest.
Year 2 fed tax: $1389
Year 2 state tax: $513.
Year 2 interest: $20,924.
Investment balance changes by -$1389 -$513 - $61,500 +$20,924.
Notice how this investment is dwindling?
Repeat each year.

Balances each year:
Year 2: $348,736
Year 3: $296,729
Year 4: $242,055
Year 5: $184,502
Year 6: $123,886
Year 7: $59,819
Year 8: -$8091 When spending $61,500/year, the lump sum payment is gone at the end if the 8th year!
Total post tax payments: $0.55 million. He gets 1/3rd of what he would have gotten by taking annual payments in this scenerio.

Yes I admit timing of the tax payments and timing of the $61,500 payments will affect the numbers. But for a rough calculation, it is stunning how wrong some people can be to take the lump payment.

Edit: I just redid the calcs. At 10% interest, he runs out in year #9. He gets a total of $0.64 million. Still far less than the annual payments.

Actually there is more to it. Most people use their money to buy a house. At 55,000 a year he would have to pay it off over 20-30 years. Imagine the interest on that. Now with the lump sum he pays cash. How much does he save? Plus their are ways to tax exempt a lump sum like a trust for his daughter. Plus he can put a chunkinto a tax exempt ira.
Plus no one knows if long term interest rates are good or bad. If inflation goes to 7 percent he loses money.
Taking the money in a lump sum gives you the flexibility to take advantage(or not be put at a disadvantage) by changing circumstances.

 

[dullard]

Originally posted by: techs
Actually there is more to it. Most people use their money to buy a house. At 55,000 a year he would have to pay it off over 20-30 years. Imagine the interest on that. Now with the lump sum he pays cash. How much does he save? Plus their are ways to tax exempt a lump sum like a trust for his daughter. Plus he can put a chunkinto a tax exempt ira.
Plus no one knows if long term interest rates are good or bad. If inflation goes to 7 percent he loses money.

Yes, there is a lot more to it. We can't plan for everything without knowing the details. If the interest is in a tax free account (but the lump sum isn't), then the totals become $0.56 and $0.67 million for 6% interest and 10% interest respectively.

The problem with dumping it in an IRA or a trust is that they don't have anything to live on. Then one or both must work. Kind of throws my whole math out of the picture if they continue to work. I just did one simple scenerio.

As for the house, they really can't afford much of a house. At $75,600 a year in guaranteed earnings, they can get maybe a $250,000 house. And that is even stretching it. Over 30 years at a fixed 6% interest (about what you can get now), that is $283,000 of interest. So the lump sum gets $1.53 million - $0.28 million = $1.25 million. He is still ahead even if interest is tax free and he has to pay interest on the house.

If he gets the lump sum payment, yes he has nearly $400k for a house. But he can't afford a $400k house. What will pay the maintanence, property taxes, and utilities on the place. This is where most people go wrong. They buy too much house. Then they go bankrupt trying to maintain the house.