Winning the Lottery: Dream or Nightmare?

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BY MARY HALL

Updated Feb 3, 2019

A house. A vacation. $1,000 a day for life. Who wouldn't want to win some expensive prize or the
lottery? Actually, a lot of people—once they realize that these jackpots aren't free. Taxes (most
prize winnings are taxed as income by the IRS) and the ongoing costs of ownership can quickly turn
some windfalls into major burdens. What follows is an analysis of some common prizes we've all
dreamed of winning and how much it can cost to win them.

The Cost of Winning a House

After winning a home, you'll be responsible for federal income tax based on the value of the home
and perhaps state income tax, depending on your state of residence. And, as with any prize, you'll
be paying those taxes at your full marginal tax rate, because the value of the prize is reported on
your Form 1040 as "other" income, on top of any earnings from employment and investments.
Unless you already own a house you plan to sell, many people can't afford to pay such a significant
sum all at once, even with several months of notice. Furthermore, consider that most prizes in the
form of dream homes are worth more than $500,000 and are located in high cost-of-living areas.

Of course, if you can afford the tax bill, you're getting a home for the price of a generous down
payment. But the costs of this type of prize don't end there. On top of income taxes, you'll also
probably have higher recurring expenses in the shape of property taxes, homeowner's insurance,
utility bills, and general upkeep. You've gained a rich new asset, but you could end up being house
poor.

A Car

After winning a car, you'll once again be responsible for federal and state income taxes, based on
its fair market value; overall, you can estimate the authorities will collect about one-third of the
value. This might not be so bad if you win a $15,000 Ford Fiesta (you get a brand new car by
paying $5,000 to the IRS), but if you win, say, a sports car that retails for over $100,000, you might
not consider yourself quite so lucky. And since cars given away as prizes are often luxury models,
the new wheels could boost your income quite a bit, maybe even into a new bracket. You'll also
have to pay registration and licensing fees.

Then there are the ongoing costs associated with auto ownership. You can bet things like
insurance premiums and maintenance are higher with a higher-class car. Oil changes on the
cheapest Ferrari, for example, are pricey. And your shiny new 500-horsepower bullet probably
doesn't get the gas mileage your current commuter car does. (To learn more, see: The True Cost Of
Owning A Car.)

A Vacation

When you win a trip, you are taxed on the fair market value of the trip and, depending on the sort
of holidays you take, the taxes might be as much as you'd normally spend on an entire vacation. As
the winner, you'll be liable for taxes on the whole prize even if multiple people (like family
members or friends) come along—unless you can get them to help out.

On the other hand, sometimes the fair market value is lower than you'd expect, because the
sweepstakes sponsor was able to get a special deal or discount, which will make your tax bill seem
like a bargain. So, while it won't be a completely free trip, it'll probably be a pretty opulent
experience.

In many cases, you will still be expected to cover some expenses on this supposedly free trip. Say
you enter a contest in which the prize is a trip for two to Paris. It includes airfare from New York to
Paris, hotel and ground transportation and half a day of sightseeing. But if you don't live in New
York, you are responsible for travel expenses to get there, all your food costs (which will be
sizable), sightseeing, tips and all other spending money. Needless to say, these expenses could
easily add up to the winnings the contest provider was shelling out.

A Dream Wedding

With a recent survey pegging the average cost of a wedding at $33,391, it's no wonder many
couples jump at the chance to score stylish nuptials for free. But a contest-financed affair often
comes with additional costs.

Take a wedding prize package offering a "designer wedding" worth more than $30,000, including a
stay at a spa resort in Mexico and an engagement photo shoot in New York. However, only
transportation to Mexico is covered. Bridesmaids' dresses and a designer wedding gown were
included, but costs for alterations weren't. So, unless everyone in your party was a perfect size 8
….

Even if key parts of the trip are covered, and the contest is explicit about what's not included, it
may not be a good deal. Such items could really have added up for a cash-strapped couple (or
their parents), and it's harder to budget when someone else is calling the shots.

A prize wedding can sometimes mean having the wedding the prize giver wants instead of the
soon-to-be-married couple. They may stipulate that the cake, decor and other details would be
chosen by the contest sponsor. Accepting a prize wedding may make having a wedding your way
next to impossible—and for many people, that's worth something too. (For related reading,
see: Have A Princess Wedding On A Pauper Budget.)

A Gambling Jackpot

Uncle Sam wants to encourage the money-wasting habit of gambling because the tax bill on any
money you win from gambling can be offset by any money you have lost. However, you'll only get
this benefit if you itemize your taxes rather than taking the standard deduction, and you can't
deduct more than the amount you have won. Winnings from horse races, betting and casinos are
all considered gambling income by the Internal Revenue Service (IRS) and must be reported as
such on your return. Depending on the type of game and the amount you win, you may have to
separately fill out a payer-provided Form W-2G for an estimated tax when you receive the prize
(gambling winnings are generally subject to a flat 24% tax), which the awarding entity
will withhold and send to the IRS on your behalf.

A Lottery

Playing the lottery counts as gambling. So should you win big, the proceeds will be considered
gambling income, with all the implications detailed above. Payouts of jackpots over $5,000 minus
the wager automatically have 24% withheld for federal taxes. Most states charge taxes too,
and depending on where you live, your total tax bill could be as high as 50%, based on your other
income.

Unlike winning a house or car, there fortunately are no ongoing costs associated with winning the
lottery, except for annual income taxes owed should you opt to take your winnings as an annuity.
More on that below.

Options for Dealing with Prizes

So, now that you know the strings attached to a big win, what can do you do? With most prizes,
you have five options:

1. Keep the prize and pay the tax. This is the best option if you can afford the tax bill (and can
use the prize, of course).

2. Sell the prize and pay tax on the proceeds. If you don't want the prize or if you can't or
don't want to pay the taxes on it, you can still benefit from your win by selling the prize.

3. Receive a cash settlement instead of the prize. If you take money instead of a tangible
object or amenity, at least you'll have the money to pay the tax that's due.

4. Forfeit the prize. If the prize isn't worth the trouble to you, you can just refuse it.

5. Donate the prize. In some cases, you can donate the prize to a government agency or tax-
exempt charitable organization without paying tax on it.

Minimizing Lottery Jackpot Taxes

Obviously, winning the lottery is a tad different, and most of the above options don't quite apply.
But you do have choices in handling the windfall.

The biggest one concerns how you'll actually get the money. As mentioned above, you'll have to
decide whether to take the payment as a single lump sum or as an annuity (annual
payments spread out over years or decades). Each choice has its financial implications, and you
may want to consult with a tax attorney, certified public accountant (CPA) and/or certified
financial planner (CFP) to discuss them before deciding.

Strictly from a tax viewpoint, the annuity has some advantages. Let's say you win a $1 million
jackpot. If you take the lump sum today, your total federal income taxes are estimated at
$370,000 (figuring a tax bracket of 37%). Instead, let’s look at what happens if you take the million
dollars as 20 payments of $50,000 a year, assuming for simplicity's sake that you have no other
income and are thus only pushed up to the 22% bracket. Your total federal income taxes are
estimated at $11,000 per year (or $220,000 after 20 years, since we're assuming for this example
that the tax rate won't change). You have saved $150,000 over the 20-year period.

Total Winnings $1,000,000 $1,000,000

Payments 1 20

Paid Out in Year 1 $1,000,000 $50,000

Taxes in Year 1 $370,000 $11,000

Total Taxes Paid $370,000 $222,000

Tax Savings $0 $150,000

Winnings Received Over

$630,000 $778,000
20 Years

Other Lottery Considerations

a. Be killed by a vending machine: 1 in 112 million

b. Have identical quadruplets: 1 in 15 million
c. Become a movie star: 1 in 1.5 million
d. Die in a plane crash or be stuck by lightning: 1 in 1 million
e. Die in a car accident: 1 in 6,700

The Lottery: Is It Ever Worth Playing?) Even if you did win the lottery, you might not be able to
hold onto the money. One of the first things a lot of people do after receiving their newfound
financial freedom is to quit their job. It's also natural to go on a spending spree: a fancy new
house, a new car, a luxury vacation. And then, maybe, help for friends, family, colleagues
(everyone you've ever known will come out of the woodwork asking for a handout). Drastically
elevating expenditures, ceasing to earn income, gifts and handouts…it's no small wonder that so
many lottery winners eventually end up in financial distress.

To avoid that, you will want to assemble a team of experts that might include an attorney for
any estate planning issues, a financial advisor and a CPA or other tax specialist, as mentioned
above, to help put a financial plan in place. Get the financial guidance you need, take the time to
plan out what you want to do with your newfound wealth, and refrain from making rash decisions,
economic or otherwise. Certainly, helping those close to you is a good thing, but you need to set
limits and learn to say no.

Be Sure It's Legit

There's another way winning a prize can hurt you: if it's a scam. Here are some things all legitimate
prizes have in common:
  You never have to pay any money to enter a sweepstakes or shipping and handling
charges if you win.

 Bank information or a credit card number is never necessary to claim your prize. (For
related reading, see: The Most Common Types of Consumer Fraud.)

The following are red flags that a contest may be fraudulent:

 Receiving a phone call or letter stating you have won a prize when you don't recall
entering any sweepstakes.

 Getting a tax form with an inflated approximate retail value on the item. You are required
to pay taxes on the fair market value of the prize.

 The organization offering the prize tries to talk you into taking advantage of dubious
tax loopholes in order to convince you to claim the prize even though you may not be able
to afford the tax.

The Bottom Line

Many people dream of winning a big prize in a lottery, contest or sweepstakes. The problem is,
when the prize isn't cash, the tax burden and additional expenses associated with your winnings
can really add up. Before you accept any prize, find out what it's worth—and what it will cost
you—before you accept it. Remember, when you win something, you are responsible for paying
taxes on it. Generally, you'll pay taxes in the year you receive the prize, which may not be the
same year you win the prize.

If you get a big cash windfall from the lottery or another type of gambling, avoid the common
mistakes: Don't do anything rash or go on a spending spree before you've hammered out an
overall wealth management plan and done some long-term thinking and goal-setting. With
lotteries, this includes determining how you want to receive the jackpot, which will impact how
much you will actually get and when you will get it.

Before accepting any prize, consider the financial implications of keeping it and make the decision
that will have the most positive impact on your long-term finances. Otherwise, your big win could
turn into a losing proposition. (For related reading, see: Investing vs. Gambling: Where Is Your
Money Safer?)
The Lottery: Is It Ever Worth Playing?
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BY INVESTOPEDIA

Updated Jan 8, 2018

Feeling lucky? You'd better be if you play the lottery. Depending on which one you play, you have
some pretty long odds. For example, the odds of winning a recent Powerball drawing in Tennessee
was 1 in 292.2 million. To put this in perspective, you have a one in 2,320,000 chance of being
killed by lightning, a one in 3,441,325 chance of dying after coming into contact with a venomous
animal or plant, and a one in 10 million chance of being struck by falling airplane parts. Most
people would agree the risk of any of these events actually happening to them is pretty slim.

Let's look at it another way. Assume you went to the largest stadium in the world (which happens
to be in North Korea). The stadium was filled to capacity. As part of the price of your ticket, you
were entered into a lottery where you could win a new car. In that case, your odds of winning are
1 in 150,000.

Would you be sitting on the edge of your seat in that stadium as they're reading the ticket number
or would you believe that, realistically, you're not going to win? To equal the odds of winning the
lottery, you would have to fill that same stadium to capacity 833 more times and put all of those
people together and have the same drawing for the one car. Would anybody believe they could
actually win in a crowd of people that large?

Still not convinced? If they were giving away a new home to just one person and everybody in the
six most populated states in the United States entered, that would equal your chances of winning
the lottery. (For more, see: Getting Rich: What Are Your Odds?)

Independent Probability

Of course, someone has to win the lottery, and the only way to win it is to be in it, as the ads say.
But what's the best way to be in it? The rules of probability dictate you do not increase your odds
of winning the lottery by playing frequently; each time you play the lottery there is independent
probability—much like a coin toss where each and every toss, regardless of the number of tosses,
has a one in two probability of landing on heads. The odds stay the same, in the lottery and the
coin toss, regardless of the frequency of playing.

You can, however, increase your odds by purchasing more tickets for the same lottery drawing.
Keep in mind, though, that two tickets might increase your odds from one in 14 million to two in
14 million, which is not a significant improvement, statistically speaking. Someone would have to
buy a lot of tickets to appreciably increase their odds of winning. Even if a person could afford to,
however, he or she could not buy enough lottery tickets to guarantee a win unless he or she was
the only person buying the tickets. As more tickets are collectively sold, the odds of winning
inversely decrease. (For related reading, see: Winning the Lottery: Dream or Nightmare?)

Who Plays the Lottery?

Your chances of winning the lottery are exceedingly remote, but that doesn't stop people from
playing. Overall, approximately 57% of U.S. adults collectively will spend upwards of $50 billion
each year in the hopes of striking it rich (Canadians spend more than $8 billion per year). Time and
again, when a lottery was introduced in a state, the local number of adults who engaged in
gambling (which a lottery technically is) increased 40%. In certain states, the majority of lottery
revenue comes from a small percentage of players. A Minnesota study, for instance, determined
that 20% of its lottery players accounted for 71% of lottery income, and in Pennsylvania, 29% of
players accounted for 79% of income, according to the North American Association of State and
Provincial Lotteries (NASPL).

So what? The lottery is just one of those fun things that we do as a way to strike it rich, right? For
some folks, that's true, but for others, often those with the least amount of money to spare,
playing for these jackpots can be a serious income drainer. An overwhelming amount of lottery
participants seem to reside in the lower economic classes, according to the stats. In California, a
study found that 40% of those who played the lottery were unemployed; in Maryland, the poorest
one-third of its population buys 60% of all lottery tickets; and in Michigan, people without a high
school diploma spent five times more on the lottery than those with a college education. Small
wonder that consumer-finance gurus say the lottery is essentially an extra tax on the poor. (For
related reading, see: The Good and Bad of National Lotteries.)

Gambling vs Investing: Which Has the Better Odds?

A curious headline was placed on the homepage of the Mega Millions website on March 25, 2011,
a day when the odds of winning had gone up to 1 in 175 million (1,166 stadiums in case you were
wondering). The headline read, "Save for Retirement." Anti-gambling groups cried foul at this
apparent attempt to spin the lottery as a means to fund a person's post-work years and lottery
officials quickly issued a statement saying they were running a campaign encouraging people to
dream about how they would use their winnings—not offering a financial strategy.

Is there a better, more profitable, way to spend or invest the money you'd otherwise devote to
the lottery? Let's look at the numbers. If a person spends $5 per week on lottery tickets, it adds up
to $260 per year. Over 20 years (a typical long-term investment horizon for stocks and bonds), the
total spent on lottery tickets would be $5,200. Putting $260 per year into stocks earning 7.3%
annually (based on equities' historical performance) yields $11,015 after 20 years. But if you just
spent the money on lottery tickets and presumably won nothing, you would be out $5,200 after 20
years.

Of course the stock market is never a sure thing; stocks can depreciate as well as appreciate. So
let's try a more cautious estimate. One study in Texas found a person without a college degree
spent an average of $250 per year purchasing lottery tickets. If that same person were to start
an IRA or other retirement account that earned a conservative average 4% annual return and
contributed that same $250 to it per year for 30 years, he or she would have $15,392 once they
reached retirement age. If they did the same thing for 40 years, that number would jump to more
than $25,000.

Although some would argue that in today's economy there is no way to guarantee that the money
would earn 4%, there's also no guarantee that it wouldn't earn far more than 4%. But all of that
aside, the odds of having $15,000 after 30 years are largely in the person's favor; certainly more so
than with the lottery's 125-million-to-1 odds. (For related reading, see: Investing vs. Gambling:
Where Is Your Money Safer?)

Lottery Winnings: Lump Sum or Annuity?

Let's say, despite the dismal odds, you do win the lottery, and you win big—six figures big. You're
going to face a lot of decisions, and the first one is how to receive the funds. With most lotteries,
you get a choice: They can write you a check for the lump sum amount or you can opt to receive it
in the form of an annuity. The lump sum is a single cash transfer, whereas the annuity is a series of
annual payments (often spread out over 20 to 30 years). Unlike some annuities that end when you
do, this is something called an annuity certain: The payouts will continue for the set term of
years, so if you pass away, you can bequeath those payments to whomever you would like. Which
should you take?

The Case for the Lump Sum Payment

Most lottery winners opt for a lump sum payment. They want all of the money immediately. That
is the main advantage of a lump sum: full and complete access to the funds. Not only do
individuals like that, but their newly acquired giant team of accountants, financial advisors, money
managers and estate lawyers do too: the more assets under management, the better! especially if
their compensation is based on a percentage of those assets.

Taking a lump sum could also be the better course if, not to be morbid, the winner isn't likely to
live long enough to collect decades of payouts, and has no heirs to be provided for.

Tax Advantage: Annuity

However, you may be in a better income tax position if you receive the proceeds over several
years via an annuity rather than up front. Why? Lottery wins are subject to income tax (both
federal and state, except for the few states that don't tax winnings) in the year you receive the
money. Say you win a $10 million jackpot. If you take the lump sum option, the entire sum is
subject to income tax that year. However, if you choose the annuity option, the payments would
come to you over several decades, and so would their tax bill. For example, in a 30-year payout
schedule, instead of $10 million all in one year, you'd get around $333,000 a year. Although that
$333,000 would be subject to income tax, it could keep you out of the highest state and federal
income tax brackets.

But even if you pay the taxes all at once, it’s roughly the same as paying them over time, isn’t it?
Not according to the experts.

If you choose the annuity option, the government takes your winnings and invests them for you—
most likely in boring, yet highly stable, Treasury bonds. Usually, when you invest, you pay taxes;
but when the government invests, it does so tax-free. So, over 30 years, not only are you getting a
monthly payment on your winnings, you’re also earning investment income on them.

Let’s say you opted for annuity payments on a $327.8 million prize, and you’re invested in a 30-
year government bond paying 4.5% interest. In your first year,you’ll earn an estimated
$14,715,000 in interest. By the end of the 20 years, your winnings would be 20% higher than when
you started. All you have to do is be OK with having somewhere around $900,000 as a monthly
payment after taxes (assuming you're in the maximum federal tax bracket, which you surely will
be).

Here’s the other advantage: If you take the lump sum, you effectively have to pay taxes twice—
once when you get the check and then again on the income you earn from investing it yourself
(you will invest most of it, right?). If the government invests it, you only pay a tax bill once (on the
annuity checks).

Other Advantages to Annuities

But perhaps the biggest argument for taking the annuity is more intangible—to protect you from
yourself. A six-figure windfall is a life-changing event, and not necessarily a good one. Most people
are inexperienced at managing such sums to begin with, but even the wisest and coolest of heads
could lose perspective, especially given the avalanche of friends, family and even strangers that
descends once the news gets out, pleading or even demanding a share of the spoils. Academics
cite research showing most lottery winners will save only 16 cents of every dollar they win. In fact,
lottery winners' bankruptcy rates soared three to five years after their big coup.

An annuity can help, by literally limiting the funds in your possession; you can't give away,
squander or otherwise mishandle what you don't have. Plus, taking the money over time provides
you with a "do-over" card. By receiving a check every year, even if things go badly the first year,
you will have many more chances learn from mistakes, recoup losses and handle your affairs
better.

The Inheritance Factor

There is a big first-world problem that comes with the annuity, though. If the payments are still
coming in when you die, your heirs have to pay estate taxes on the money, the entire amount
that's left. They might not have the cash on hand to do so. Powerball has an answer, if your state
allows it: Upon your death, it will convert your annuity into a lump-sum payout. At least then the
tax bill can be covered without forcing anyone into bankruptcy. (For related reading, see: Estate
Taxes: Who Pays What? And How Much?)

The Bottom Line

If you ever do win the lottery, you will want to work with your financial advisor, tax attorney
and CPA to determine which option is best for you: taking the winnings all at once or in annuitized
payments over decades. As a rule of thumb, if you and your money-management team think they
can invest to earn an annual return of more than 3% to 4%, the lump sum option makes more
sense over the annuity, at the end of 30 years.
Many people see purchasing lottery tickets as a low-risk investment: Where else can you "invest"
$1 or $2 for the opportunity to win hundreds of millions of dollars? The risk to reward ratio is
certainly appealing, even if the odds of winning are remarkably small. Is it better, then, to play the
lottery or invest the funds? There is no one universally correct answer. Much of it depends on
what money is being spent. If it is needed for retirement or the kids' college, it may make more
sense to invest: A payoff is more certain down the road, even if it doesn't amount to a sexy six-
figure check. If, however, the money is tagged for entertainment, and you would have spent it
seeing the latest movie anyway, it might be fun to take the chance. Keeping in mind, of course,
that you are more likely to die from a snake bite than to ever collect.
The Good and Bad of National Lotteries
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BY LEWIS R. HUMPHRIES

Updated Oct 19, 2018

Lotteries and prize drawings are big businesses throughout the world. They entice significant
annual investments from individuals who dream of scooping a huge and potentially life-changing
cash prize. Their proceeds also go to public sectors including education, park services and funds for
veterans and seniors. In the United States, the Mega Millions and Powerball lotteries have become
a key feature of monthly consumer expenditures. In 2016, the lottery generated $72,649,684,000.
The profits generated by national lotteries are therefore understandably huge. With the stakes so
high and the chances of winning so minimal, however, is participating in the lottery a waste of
cash or simply a high-risk investment opportunity that is worth a weekly gamble?

SEE: Is The Lottery Ever Worth Your Money?

Lotteries in the U.S.

In actual fact, while your chances of winning the lottery anywhere are decidedly slim, the sheer
size of the U.S. population and popularity of the game means that American participants must
climb an even steeper mountain towards any potential windfall.

Now even though this equates to several tickets being purchased per U.S. resident, the odds of
each participant winning have historically stood at approximately 1 in 176,000,000. This means
that statistically there is a greater likelihood of being struck by lightning or becoming
a billionaire than there was of claiming the Mega Millions jackpot. Americans still invested more
than $70 billion into chasing their fanciful dreams of wealth and fortune. This is reflective of a
growing trend, where lottery sales continue to soar despite the uncertain economic climate.

By state, New Yorkers have been one of the leading lottery spenders. In 2016, New York
accounted for 9.7 billion in lottery sales. California, Florida, Massachusetts and Texas rounded out
the top five for spending.

SEE: Going All In: Comparing Investing And Gambling

The Argument Against National Lotteries

An interesting consequence of the Mega Millions jackpot win is that there has been a significant
rise in the number of syndicates that are purchasing tickets. This proves that rather than being
discouraged by the seemingly insurmountable odds of victory, Americans are instead looking for
innovative ways to improve their chances and actively investing more into buying tickets. Now,
while an estimated one in three global lotteries are won by syndicates, the likelihood of winning
remains remote in the extreme, which raises questions about participants and whether they could
put their money to better use.
Even for those who win the lottery, their financial future or long-term happiness is not necessarily
secured. Acquiring huge sums of money can inspire any number of extreme emotive reactions,
and there have been several instances where winning the lottery has triggered a serious decline in
lives of individuals and families.

The Benefits of National Lotteries

In 2018, there have been four mega millions jackpot winters. The last winner taking home - $543
million on July 24, 2018. This lottery winner was a resident of Santa Clara County, California who
received their ticket through an office pool. As of October 17, the mega millions jackpot had
increased to $900 million.

In total the average American spends approximately $223 yearly in the lottery. With the large
majority of people spending more as the payout rises. This would suggest that rather than being
symbolic of a growing gambling culture in the U.S., national lotteries are in fact a popular news
items with their tickets played responsibly and only sporadically by most participants.

Another factor in favor of lotteries is the money that they generate for state funded projects, with
public education in particular benefiting from the investment made by participants. With this in
mind, people who play the lottery responsibly are contributing towards local community
development, which actually means that their annual investment at least creates some form of
social change. In terms of monetary value, approximate 34 cents out of every $1 spent on lottery
tickets is invested into education, with 58 cents being awarded to winners in the form of prizes
and 6 cents paid to participating retailers for sales commissions.

The Bottom Line

National lotteries across the globe are always likely to be the subject of extreme opinion and
controversy. The fact remains, however, that participants have an individual accountability to play
the game responsibly and spend within their means while pursuing the dream of huge cash prizes.
As long as they do so, then there is no reason why they cannot enjoy the lottery while also
contributing to state and national funding.