Lottery Win - Accounting
Most state lotteries now provide the winner with the option of receiving an equal annual amount over 20 or 30 years, or a lump sum up front. Which would you choose? How do you think the lottery calculates the lump sum? Is the advertisement of the prize total entirely truthful?
There are considerations that must be made by those lucky enough to win the lottery.
Present value shows that if someone takes the lump sum upfront they will get less than the actual advertised jackpot. This is because the lottery company uses the present value and purchases annuity or bonds that generates interest, which funds future payments. However, if the winner takes an annual payout over about 20-30 years they will receive the full amount. Therefore, to guarantee the full jackpot it seems wiser to take the money over a number of years. Nevertheless, there are issues with that; for example, the winner may need the money now or might believe they can generate a bigger sum over the extended period through an alternative method than the lottery organization uses.
There is also a tax issue to be considered. I will use the Korean lottery as an example. Let’s say the jackpot amount is $1,200,000. In Korea, if the winner wants to receive the lump sum, they will have to pay 11% more than usual tax rate (which is 22%) because the lottery amount is more than $300,000. Therefore, the total amount they will be able to obtain will be $804,000. However, if the person takes the amount over 20 years, they must pay only 22% tax, so they’ll get about $3,900 per month. This means the total amount the winner will receive after 20 years is $936,000.
It does seem unfair that the lottery company is able to advertise a jackpot that in reality they will not pay out immediately. From a legal standpoint, it can be assumed that the advertisements will include something along the lines of “terms and conditions apply,” where these key details will be noted in very small print no doubt.
There are considerations that must be made by those lucky enough to win the lottery.
Present value shows that if someone takes the lump sum upfront they will get less than the actual advertised jackpot. This is because the lottery company uses the present value and purchases annuity or bonds that generates interest, which funds future payments. However, if the winner takes an annual payout over about 20-30 years they will receive the full amount. Therefore, to guarantee the full jackpot it seems wiser to take the money over a number of years. Nevertheless, there are issues with that; for example, the winner may need the money now or might believe they can generate a bigger sum over the extended period through an alternative method than the lottery organization uses.
There is also a tax issue to be considered. I will use the Korean lottery as an example. Let’s say the jackpot amount is $1,200,000. In Korea, if the winner wants to receive the lump sum, they will have to pay 11% more than usual tax rate (which is 22%) because the lottery amount is more than $300,000. Therefore, the total amount they will be able to obtain will be $804,000. However, if the person takes the amount over 20 years, they must pay only 22% tax, so they’ll get about $3,900 per month. This means the total amount the winner will receive after 20 years is $936,000.
It does seem unfair that the lottery company is able to advertise a jackpot that in reality they will not pay out immediately. From a legal standpoint, it can be assumed that the advertisements will include something along the lines of “terms and conditions apply,” where these key details will be noted in very small print no doubt.