Lump Sum vs. Installments | TaxConnections

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Three separate lottery winners in the third highest Mega Millions have some tough decisions ahead of the them.

In addition to deflecting requests for money from every person they have ever known (and many they have never even met), will have some “good” problems to deal with like – taxes, investment options, insurance protection and ensuring their after-tax funds outlive them. Unfortunately there are more financial horror stories about lottery winners than happy endings – mainly attributable to the fact winners seldom have any experience handling even moderate sums of money.

Before claiming their prizes, I recommend that they have some in-depth conversations with a qualified attorney, CPA and investment advisor (best if all are in the same room – and are not a relative).

The most pressing issues are:

1) Can I retain my anonymity?

2) Am I a solo winner, or are there other family members and/ or friends/ co-workers that are entitled to a portion of the winnings (and the related taxes)?

3) Should I take a lump-sum or installments? Read More

Written by Blake Christian | Posted in Individual • IRS • North America

Take the installments!

Despite everyone telling you to take the lump-sum. Your heirs will receive the balance if you die before collecting all the payments and at least 65% of your lump-sum amount will be gone within the first year due to discounting and taxes.

A lump-sum winning will typically get reduced by 45% or more for the time value of money (acceleration by 20 plus years) and then the net amount is further reduced by approximately 35% or more for taxes — leaving a net amount of 35% or less of the gross winnings.

Installment collections will generally only be subjected to the federal tax hit (depending on state rules) and the taxes are paid over the collection period. In effect, each payment includes a layer of interest earning and once the amounts are received, the recipient is free to make their own investment decision on those funds. Read More