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Lottery Logic: There Is None When It Comes to Paying Taxes

Lottery winnersPop quiz: When is a $656 million lottery jackpot not a $656 million lottery jackpot?

Answer: When Uncle Sam gets his hands on it. And according to the results of a recent poll conducted by the Hoover Institution, Americans aren't amused at the numbers game.

Lottery Math

Last month the nationwide "Mega Millions" lottery named three winners in its record-busting jackpot, supposedly worth nearly two-thirds of a billion dollars. The true number of the payout (while still substantial) was a whole lot smaller than that.

Let's start with the headline figure: $656 million. In fact, claiming the full dollar amount requires a lottery winner to receive the winnings as an annuity, doled out in drips and drabs over many years. Unsurprisingly, many people who get "lucked by lightning" and win the big prize instead grab the cash and run, lest the Fates discover their mistake and try to take it back. Electing to take a lump sum payout, however, lops about 28% off the size of the prize, reducing it to $474 million.

Then there's the issue of multiple winners. Three winning tickets were sold in the most recent Mega Millions drawing, with the result that winners had to split the prize three ways. On a lump sum payout, that works out to $158 million apiece.

Still a lot of moola, you say? Well, wait just one second, because there's another hand that wants to dip into the till -- and it's taking the biggest cut yet.

According to the taxman, lottery winnings are taxable as ordinary income. At the 35% income bracket (that any multi-million-dollar winner instantly falls into upon winning), this works out to roughly $55 million going right back to the government in the form of income tax.

When all is said and done, this month's $656 million prize wound up being "mega" in name only for its three winners, who took home barely $100 million apiece.

Give Lottery Winners a Break, Say the Masses

Of course, anyone would gladly take the $100 million left over after Uncle Sam takes his dole. Still, seeing a prize billed at "$656 million" whittled away, practically overnight, to a mere $100 million strikes some taxpayers as wrong.

According to a recent poll conducted by professor Brian Gaines of the University of Illinois and professor Douglas Rivers of Stanford, the average American believes lottery winners shouldn't have to give back more than about 10% of their winnings to the government -- and, in any case, not more than 15%.

Most voters, it turns out, think it's downright unfair to give a person a once-in-a-lifetime windfall, only to claw back more than a third of the wealth before anyone's had a chance to enjoy it.

Now, if this sounds like an argument against taxing millionaires and the "Buffett rule," it probably is, in part. After all, the Hoover Institution is pretty widely known to be a bastion of conservative thought. But there's another angle to this data, too.

You Can Have My 30% When You Pry It From My Cold, Dead Hands

By Hoover's own admission, most Americans support raising taxes on people who earn more than $250,000 a year. In fact, 62% of voters polled support passing the so-called "Buffett rule," requiring at least a 30% tax on "millionaires."

But why the disconnect? Why do the same people who want to shave 30% off the paychecks of those who earn one million dollars balk at the idea of charging more than 15% to folks who scored a $656 million, $158 million, or $100 million payday?

Perhaps it's because to many people, the idea of having $1 million in their bank account -- much less $100 million or more -- seems very unlikely. "It's never going to happen to me," they think, "or to anyone I know." And as the saying goes: "Don't tax you, don't tax me, tax that guy behind the tree."

But here's the thing: Statistics prove that you're many times more likely to earn $1 million than to win it through a lottery. According to CNN, in tax year 2010 alone, the U.S. produced no fewer than 80,000 new "multi-millionaires." We minted 600,000 new garden-variety millionaires that year and 800,000 half-millionaires -- most by dint of hard work and diligent saving.

You Gotta (Work and Save) to Win

Believe it or not, what these figures mean is that while you may have only a 1-in-176 million chance of ever winning a Mega Millions jackpot, your chances of becoming a millionaire in your lifetime are pretty realistic -- one in 526. Set your sights on the more modest goal of saving only $500,000, and your odds rise to one in 385. Indeed, aim a little higher, work a little harder, and start investing a little sooner, and one out of every 3,846 of you can become a real multi-millionaire.

No lottery required.

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Waz up Daddy?

Let's see. I'm no mathematician but 3 X 100(net) is still 300 million. Yeah, you're right, that's ridiculous(sarcasm)
35% fed tax isn't all that bad really, considering us working slobs are in the high 20's or even 30's. So go ahead and tax me at 35%, I'll make do with the chump change that's left over....
I think the only sucker here is the idiot that wrote the article. Sure it's a dream, but there is a winner during these drawings, why can't one of them be you. You certainly won't win if you don't sacrifice that $1

December 03 2013 at 12:20 PM Report abuse rate up rate down Reply

I would be happy just living off the interest on that kind of money

September 17 2013 at 3:01 PM Report abuse rate up rate down Reply

in England, where sports betting is legal, when you placed your bet you had the option of paying the tax at that time on the cost of the bet. If you took this option, the winnnings, if any, were tax free.
Now obviously the goverment was not being kind, most bets loose so they still got their money.
I would pay the tax on a lottery ticket in a heartbeat.

May 17 2013 at 10:38 AM Report abuse rate up rate down Reply
Craig Tucker

The difference in lottery wins and regular income is that its once in a lifetime unless you take the annual payments. When the rich get taxed they are most likely going to be getting that same paycheck for a few years to come its a constant source of revenue unlike winnings which is one time.

September 12 2012 at 8:45 PM Report abuse rate up rate down Reply

I have said for years that taxing gambling winnings is unfair. When you buy the lottery ticket you pay tax on it. The government has it's hand out going and coming and takes no risk in the process. I think you paid your tax when you bought the ticket that should be all uncle sam should get. They whole problem is that congress look at our income as the US Governments income and they are giving you and allowance. I say stay out of my pocket the IRS and income tax is illegal anyway and they know it.
Also when they started all these lottery games I thought it was supposed to go to education and roads etc. I haven't seen one thing improve since they have started. Where is the money going?

June 13 2012 at 7:23 PM Report abuse rate up rate down Reply

Come on, whether you make millions through the lottery, capital gains, or as salary or bonuse, you should pay taxes and not complain about it. Until the year 1970, income over 100,00 was taxed at 70 percent, and the country was properous. Zuckerberg may avoid paying taxes, but all he will miost likely get out of his 16 billions is as bitter divorce.

May 23 2012 at 4:22 PM Report abuse rate up rate down Reply
1 reply to gertaron's comment

Are you really serious? Why not give ALL your money to the government and then hope they give you a little to live on? Oh, wait, we are almost there already? Happy?

December 09 2013 at 5:24 PM Report abuse rate up rate down Reply

well the good part only 1 in 700million people have to get upset about prize,the rest of us simpltons who play can go on to bed depressed after the draw

April 23 2012 at 11:33 PM Report abuse rate up rate down Reply

"Liberals" are corrupt - playing racial politics, class-warfare, greed, envy, and lying, lying, lying.

President Mitt Romney.

Sounds wonderful! What a relief!

April 19 2012 at 12:27 AM Report abuse +1 rate up rate down Reply

Everyone is for taxing the rich, until they become rich.

April 18 2012 at 3:59 PM Report abuse +2 rate up rate down Reply
1 reply to ww1621's comment

Typical liberal thinks that way.

December 09 2013 at 5:25 PM Report abuse rate up rate down Reply

A government run lottery is a far worse scam than even this article contends.

First of all virtually all of the ticket sales are geared to lower income people. It comes from their after tax money. Most government run lotteries only pay out about 50% of what is taken in. The government keeps the rest. Some of it is used to run the lottery, but the bulk goes to the government exactly like a tax. Thus when a hundred thousand $1.00 tickets are sold, the government actually gets Fifty Thousand Dollars in revenue.

Then what happens is that the individual dollar sales are accumulated into a big pot and given to a very few people in big dollar amounts. Those dollar amounts however become a big hunk of income to just a few people. The individual purchaser has contributed his presumably low tax income into a scheme that converts it to a high tax income for very few people.

Then effectively the Federal Government lops off its highest tax rate on those few people. At the same time, under the current tax code those few people lose virtually all of their otherwise allowable deductions.

If you step back from the entire scheme and look at only the input and the output for the ticket buyers in aggregate this is what you get: The purchase of each dollar worth of tickets gives the government (State and Federal) approximately 85 cents in revenue while approximately 15 cents is returned to the ticket buyers in total.

This scheme makes the greediest business scammer look like a kitten.

April 18 2012 at 10:19 AM Report abuse rate up rate down Reply
2 replies to alyackey's comment

The lottery has famously been called a "regressive tax on stupidity".

April 18 2012 at 3:07 PM Report abuse +1 rate up rate down Reply

I will assume that none of what you posted is a surprise to you. To a liberal "Greed"= hard working business owner. To a conservative "Greed" = just about any politician.

December 09 2013 at 5:29 PM Report abuse rate up rate down Reply