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Anonymous
Anonymous asked in Business & FinanceTaxesUnited States · 1 month ago

why does lottery have such a large penalty on lump sum ?

I mean if they can give away 1.5 billion dollars over the period of time to get that high they probably took in 10 billion.  I understand it is a business they need to make money to but to only get 900  million out of 1.5 billion before taxes is ridiculous.  I should get the full amount really should be no taxes but I could do the taxes but being penalized such a large amount is dumb in my opinion.

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  • 1 month ago

    Your opinion is dumb. Take a few economics classes and it will make sense.

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  • 1 month ago

    Its not a penalty, its a mathematical calculation using the time-value of money and a presumed interest rate.

    The $1.5 Billion prize is an annuity paying $50 million per year for 30 years.

    When you assume a conservative interest rate of about 4% annually, and do the math, $900 million right now is of equal value.

    Or, put it this way: If you take $900 million, put it in the bank at 4% annual interest and let it sit for 30 years, you will have the same amount of money at the end as someone who put in $50 million per year every year for 30 years (at the same 4% rate).

    Another way of looking at it is that if someone gave you $900 million dollars, you could put in in an account earning 4%, you could pull out $50 million per year for 30 years before you'd run out of money.

    If you're confident that you can beat the interest rate they use in their lump sum calculation, then you can come out ahead in the long run by taking the lump sum.

    Taxes are another issue - its a huge source of tax revenue that doesn't affect very many people so there isn't a huge push to make our budget problems worse by giving a tax exemption to the handful of people who win life changing jackpots. Its just not something that is going to get people to vote for a particular politician, so its not something politicians are going to worry about.

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  • 1 month ago

    Because it is more difficult to pay it out all at once. You are not "penalized" as you had $0 to begin with. All of the money is a bonus.

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  • 1 month ago

    The lump sum represents the present value of the jackpot paid now instead of installments based on an imputed interest rate. In accounting terms it is call the present value of a future interest.

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  • 1 month ago

    First, if they can give away only $1.5 billion, then they didn't bring in $10 billion. If the lump sum is $900 million, that means they only brought in about $3 billion, which means they can't give a lump sum of $1.5 billion or anything close to that. They only reason that they can give $1.5 billion at all is because they can invest the $900 million and make $600 of interest or whatever to add to the $900 million.

    There is no "penalty". The amount of money they took in that goes to prizes is fixed by law and is the same regardless of whether you take the lump sum or not. The lump sum is the maximum amount of money taken in that can be used for prizes; the large amount you get if you don't take the lump sum is the lump sum plus what they anticipate making in interest, etc., by investing the money before they pay it to you.

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  • 1 month ago

    It doesn't. The 'Jackpot' amount is the total value of payments over 20 years they can generate by purchasing an annuity in the amount of the cash option. In reality, the cash option IS the actual prize amount. If you take the cash option and invest it for an AVERAGE return, you can draw payments LARGER than those for the 20 year payout and still have some left after 20 years.

    You also TOTALLY IGNORED the MASSIVE amount spent advertising the lottery, the costs of running the lottery, and the bonus to the merchant that sells the wining ticket.

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  • martin
    Lv 7
    1 month ago

    It's because lotteries are gambling, and gambling still is considered a vice that the government will not encourage, although they make a bundle off the addicts.

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  • Judy
    Lv 7
    1 month ago

    It's not a penalty. You get it all immediately. If you take it over 20 years, it has lots of time to grow.

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  • Anonymous
    1 month ago

    Take some economics and the time value of money and all will be revealed.

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