Friday, January 08, 2016

Tax on the Math Impaired

Today for the first time since the year 2000 I bought a lottery ticket.  As of this writing, the lottery stands right around ~$800 million.  And that got me to thinking, how much would it cost to assure you had purchased "the" winning ticket.

Turns out power-ball has 292,201,338 combination.  At two dollars a ticket, it costs $584,402,676 -- just over a half a billion dollars. So if the pay out were $584,402,676 then buying all the tickets would result in winning that amount of money.

But you don't get it all.  You get an annuity that pays out over 20 years.  And the money you get 20 years from now will not have the same value as the money you paid today.  So the lottery office offers a lump sum today of 62%.  That raises the required pay out to $942,584,961.  But then you have to pay federal income tax (I live in a sales tax state so I am ignoring state and local taxes).  Top marginal tax rate is 39.6% so that raises the payout to $1,560,571,127.

Here's how it would break down

Less 38% lump sum discount$593,017,028
Net Lump Sum Payout$967,554,099
Less 39.6% tax$383,151,423
This is what you really get -->$584,402,676

But then there is the risk or more than one person having the correct numbers. And the payout is split again. So even now, the power-ball lottery is a tax on the math impaired.