Lottery Fever

A few times a year, we get to see the exciting ritual play out in the media as the Powerball or Mega Millions lottery jackpot prizes reach dizzying heights.

The latest Powerball jackpot is estimated to be $1.25 billion ($1,250,000,000 — a lot of zeros). And there is a lot of media coverage.

The advertised jackpot ($1,250,000) is not the amount you receive in cash. The lump-sum/cash option is typically about 40–60% of the advertised jackpot. For a $1.25 billion jackpot, that cash value might be roughly $500,000–$750,000 (often ~45–50%) before taxes.

Official cash percentages vary each drawing based on interest rates and total jackpot. The exact cash amount is set by the lottery at the time of winning, but the lump sums are always materially less than the advertised jackpot. The cash lump sum is based on the value of the annuity purchased today to finance the yearly payouts.

However, for simplicity and a rough estimate, we will assume the lump sum value is $750 million (60%) before taxes. I am not sure what happens to the other $475,000,000, but I guess that is the “house’s” share. The jackpot advertised is roughly 50% of the gross take, which would make the gross take $ 2.5 billion.

You would get the entire $1.25 billion if you spread out the payments over 30 years (about $40 million a year, before taxes). But we will just look at the lump sum and TAXES.

1. The IRS immediately withholds 24% of large lottery winnings. But because this pushes you into the…