Taxes on Lottery winnings
So, you’ve just won the Michigan Lottery, congratulations!!! Now you’re wondering about the tax implications.
Well, the first thing to consider is do you want the winnings in equal installments over the next 26 years or do you want the lump sump. The Michigan Lottery pays the present value of the prize. Put another way, let’s assume you won $1,000,000.00 prize in the lottery. You can choose to get
$ 38,461.53 every year for the next 26 years or you can choose a lump sum amount of about
$ 360,689.00 assuming a 4% discount rate for the 26 years.
How does this pan out for taxes?
For the installment option; will you continue to work? Are you currently retired receiving social security or a pension? Many factors determine the tax on the winnings but for simplicity sake let assume you’re married with one child, earning $80,000 per year. The additional $38,461 of lottery winnings will be taxed federally at 25% and for the state 4.35% The taxes will be withheld from your winnings check every year so your ‘net’ take home will be about $ 27,173. Not bad for being lucky. But consider over the 26-year period you will pay $250,000 in federal tax and $43,500 in state income tax or a total of $ 293,500. And historically a dollar today is really $2.77 twenty-six years from now.
For the lump sum option; the $360,689.00 will be taxed at federal rate of 35% and state rate of 4.35%. Again the lottery bureau will withhold the tax so you ‘net’ out to $218,758. The federal tax is $ 126,241 and the state tax is $15,690. Using this option you will pay less taxes over the long haul and you will be paying with current dollar value. Certainly a better deal IF you can investment the winnings earn a rate of 4% or better and historically it has been the case.
For more information regarding the taxes on lottery winnings or other “sudden” wealth, please feel free to call me at 734.379.0022 or email at jgarzacpa@jgarzacpa.com