Lump sum or payout for 30 years? Here’s what you should know

Lump sum or payout for 30 years?  Here's what you should know

It’s one of those $1.55 billion problems you really wish you had.

the next day mega millions The drawing gets close to 11pm on a Tuesday, you might be wondering what to do when you win, like, “Should I take a lump sum payment or a long term payment?”

Yes, it is a problem that we all wish we could face soon. Oh, there are other concerns too, so while you still have a chance to worry about winning, let’s get to it:

What is one of the biggest mistakes you can make when winning Mega Millions?

Maybe, like bragging? Letting too many “friends” know your good luck?

historical mega millions The jackpot for drawing on tuesday is estimated $1.55 billion – or $757.2 million for those choosing the total cash option. It is impossible to predict the prize money in advance because it is not known how the recent frenzy might stack up.

Mega tickets cost millions $2 per game.

A person buys a Mega Millions lottery ticket at a store on July 29, 2022 in Arlington, Virginia.

A person buys a Mega Millions lottery ticket at a store on July 29, 2022 in Arlington, Virginia.

mega millions Four Grand Prizes have been awarded exceeding $1 billion – one in 2018, 2021, and 2022, and one in January 2023.

In 2021 a small group in Oakland County called the “Wolverine FLL Lottery Club” hit $1.05 billion jackpot. The group chose the cash option or a lump sum of $776.6 million before taxes, according to Jake Harris, Michigan Lottery’s director of player relations.

One person Served as representative and spokesperson for the group – Curt d. A Florida estate planning attorney with a lottery practice Harris said he’s a member of that club. The identities of the remaining members of the group were not disclosed.

If you win mega millions To win the Michigan jackpot, you have to announce to the public for the sake of transparency, Harris said. If you win as part of a group, he said, the Michigan Lottery generally works with a club member to act as a representative and spokesperson to fulfill media obligations for the group.

The winning 2021 Michigan ticket was purchased at a Kroger Store in Novi. Winners had the choice of accepting the award as a graduated annuity or as a lump sum.

You win a billion – or you get hundreds of millions at once – and the word will no doubt spread.

“Be careful who you say,” advises Holly Armstrong, a spokeswoman for the South Carolina Education Lottery. “You may not want to post it on social media. It’s not a good idea.”

Usually, lottery experts suggest you sign the back of your ticket if you’ve got a winner, put the ticket somewhere very safe and be very careful with whom you tell. If your husband or wife has a big mouth, you probably shouldn’t tell them so early in the process. Big lottery winners are often encouraged to take their time putting together a team of legal, financial and tax advisors before claiming the jackpot.

Harris said the Michiganders have up to one year after the big win to claim the award. So if you win on August 8, 2023, you will have until August 8, 2024 to claim the money.

The record Mega Millions jackpot was $1.537 billion, which he won in South Carolina in 2018. Armstrong said the winner — who wasn’t part of a lottery club or group — won it all and decided to take home a grand total of $877 million. One person – all the money.

Erin Steinberg sells a Mega Millions lottery ticket to Anthony Bermaud at Bob's News & Books on August 4, 2023 in Fort Lauderdale, Florida.

Erin Steinberg sells a Mega Millions lottery ticket to Anthony Bermaud at Bob’s News & Books on August 4, 2023 in Fort Lauderdale, Florida.

Armstrong said the winner was kept anonymous, as is permitted in South Carolina, and described only as “South Carolina.”

This winner was, oddly enough, so courteous, he reportedly let a fellow customer at a KC Mart convenience store in Simpsonville, South Carolina, jump in line to purchase a ticket just before the winning ticket was sold.

When announcing that a winner had applied in March 2019, just months after the October 23, 2018 drawing, the Lottery Commission said in a statement, “A simple act of kindness has led to an amazing result.”

No, the winner did not sign the back of the large check and take it to the bank. Instead, Armstrong said, the money was sent via wire transfer to the winner’s account.

Of the eight South Carolina jackpot winners since 2002, Armstrong said, all have taken the total cash option.

Should you take a lump sum in the lottery or stretch its payments?

Personally, if I played the lottery and I didn’t, my first instinct would be to take all the money and run. But this isn’t usually the best advice for a long list of reasons. I know that and you probably do too.

“From a tax standpoint, it usually makes more sense to distribute your lottery receipts and avoid a liquidated payout,” said James Haynes, MD, an undergraduate professor of economics at the University of Michigan in Ann Arbor.

But if you think, as some do, that tax rates for the rich—and yes, you’ll be very rich—will go up in the future, you can think about the lump sum.

Lottery winnings will be taxed at the federal and possibly state levels. winner in Michigan You will also pay state income taxes.

The Michigan winner could look at the state’s lower income tax rate in 2023 as an incentive to take a lump sum this year, said Lisa Paul, principal and director of state and local taxes at Rehmann in Grand Rapids. The 2023 state income tax rate in Michigan has fallen to 4.05% but the state income tax rate will return to 4.25% in 2024.

Mark Stepper, chief tax information officer for Jackson Hewitt Tax Services, said that lottery winnings are considered “ordinary taxable income.” The highest federal tax rate is 37% and this is where the big winners end up.

Federal taxes are withheld at 24% on lottery winnings when paid in Michigan. Michigan winners will also see a 4.25% withholding to cover state taxes, according to Harris, in the Michigan lottery.

More federal taxes will be paid, Steber said, once a taxpayer files 2023 federal income taxes based on gross taxable income.

On a lump sum of $757.2 million before taxes, the federal withholding is estimated at $181.7 million if 24% is withheld. That would bring the compensation to about $575 million.

The lump sum payment will decrease further if state income taxes are withheld, depending on the state.

If you are handing out Mega Millions payouts in the most recent jackpot of 30 years, You’ll likely get $23.3 million in the first year before taxes, Steber said. After that, you’ll get payments every year for the next 29 years, Steber said.

Total payments are increasing each year by about 5%, with the last payment in the most recent year amounting to about $96 million before taxes, according to the online Omni Calculator “Mega Millions Payout Calculator.”

Total payments before taxes after 30 years equal the total amount earned.

Make no mistake, you still pay taxes on these payments over 30 years. For example, federal taxes on $23.3 million for the first year would be roughly $8.6 million only that year.

If you die early, Stepper said, you can include the remaining earnings in your will.

Why would a lump sum work?

The winner, of course, has more control over more money by taking a lump sum.

said Henry Grzys, principal director of tax practices and ethics at the American Institute of Certified Public Accountants.

You knew you would be paying the 37% highest federal tax rate now. The highest federal tax rate over the past 30 years has fluctuated, Grzys said.

For example, hitting the upper bracket 39.6% in the 90s. The Economic Growth, Tax Relief, and Reconciliation Act of 2001 then lowered the top income tax rate to 35% from 2003 to 2010. The American Taxpayer Relief Act of 2012 then raised the top income tax rate to 39.6% again.

The top income tax rate has been reduced to 37% for tax years beginning in 2018.

If you take the annuities, Grzes said, you get the money over 30 years in equal installments, plus a 5% annual increase each year, and you’ll pay taxes over those 30 years, again, based on your current tax rate each year.

Gryzis said some people might think they could get a better rate of return of 5% per year if they took that lump sum now and invested it, rather than opting for 30-year payments.

Maybe they can do better. But maybe they can’t.

UM’s Hines said: “From a financial management perspective, the good advantage of taking a lump sum is that you can access the funds immediately. Of course, the bad advantage is that you can access the funds immediately.”

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One of the big problems that lottery winners can have is that everyone finds out that you are a lottery winner.

Family, friends, and people pretending to be friends, Hines said, can all insist that they share this newfound wealth. You can finally pick up the tab for everything.

And many of them have sure-fire ideas for making more money—as if you’d need to do that if you won a billion dollars or more.

Hynes said pressure from family and friends can be another good reason for not paying your liquidated payout.

“Payment pairing won’t fix all the issues, but it does at least give the winner a chance to learn over time who to trust and how to manage their newfound wealth.”

How much determination do you have to simply learn about key phrases? Perhaps statements like: “I’m fine, thanks,” “No, I’m not interested,” and “I would never, in my wildest dreams, give you that money.”

You can’t simply collect the Mega Millions prize and keep spending a billion dollars like you’ll never run out of money. You can – and you will if you listen to a lot of people.

“The biggest mistake you can make is to take a lump sum and then do with the money what those around you want you to do,” Hines said.

Contact personal finance columnist Suzanne Tombor: Follow her on Twitter @tomorrow.

This article originally appeared on the Detroit Free Press: Mega Millions Jackpot: Lump Sum or Annual Payout? what do you know

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