Post
by **nisiprius** » Mon Dec 13, 2010 6:48 am

How do taxes figure into this? I think I'd be sure I work that out in advance. I am spitballing here because I've never played the lottery or paid taxes on lottery winnings. I might be totally out to lunch on this but the organizer dare not be.

Isn't it true that

a) taxes are withheld, and

b) the announced jackpot amount assumes annuitization?

Is the winner going to be forced to take a lump sum even when that is likely not in their best interest?

**Yikes! What about the gift tax?** Doesn't that come into play when it comes time to distribute shares? If not, why not?

Someone could win a jackpot of $X and their actual lump-sum payout after withholding could be much less than that. Could it even be less than 50%? If so, how do they make their 50% donation?

Does everyone in the group *really* understand that if the group wins a jackpot of $80,000,000, that does not mean they are each going to get a million dollars?

The numbers here are total guesswork. The point is that someone needs to fill them in with nonguesswork before you start explaining the deal to people.

If the person who buys the ticket wins "$80,000,000," which really turns out to be (say) a $60,000,000 lump sum, from which 25% is withheld, leaving $45,000,000. If everything goes smoothly, when the dust has settled they give $40,000,000 to the synagogue. At this point they have $5 million in cash.

The person takes a $40,000,000 itemized deduction, leaving $20,000,000 on which they are liable for tax. $20,000,000 is surely going to put them in the 30% tax bracket, so they owe $6,000,000 in taxes. Since $15,000,000 was withheld, they presumably get a refund of $9,000,000, plus the $5 million they already head, so they have $14,000,000 to distribute among forty people.

That's $350,000 each, but since that's well over $13,000, before they distribute it, **they need to pay the gift tax**. Five minutes of Googling convinces me that the gift tax is complicated--90% of what's there tells you how to stay under the limit. I had to go to the Form 709 instructions to find out what the tax percentages actually are. It looks as if in a rough general way, if you're distributing a total of $14 million, you're going to be paying something in the ballpark of 40% gift tax before distributing it.

So each participant is going to have to wait until the lottery ticket holder gets their income tax refund, and then is going to get about $200,000 instead of the million they might have been expecting.

I can't imagine getting every single one of 39 people to believe that receiving $200,000 from 1/40th of half of an $80,000,000 jackpot is on the up-and-up.** The winner might as well stiff the participants because they're going to think they were stiffed anyway. **

I think you'd better have something prepared in advance, an *accurate* example calculation showing "If we win $X, you will get $Y."

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.