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jgordosea, Enrolled Agent

Category: Tax

Satisfied Customers: 3161

Experience: I've prepared all types of taxes since 1987.

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I must make a decision on receiving a $10,000,000 sweepstakes

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I must make a decision on receiving a $10,000,000 sweepstakes prize in one of two ways. I am 62 years old and the options are as follows: a $225,000 annual payment, for 29 years and a final lump sum payment in year 30, of $3,475,000; or an immediate single payment of $3,739056.33. My current annual income is: $36,648.72. Part is Social Security and part is Pension with have annual cost of living increase that are minimal and I understand there will be no more Social Security adjustments for the next few years.

What would be the best choice, this instance, and how much would I pay in taxes in each instance. I currently have no other income, live alone with no dependents and have no major health or charitable deductions.

What happens to the remaining annual payments and the lump sum payment if you do not survive to collect all the payments?

I have not received an answer on this question, so let us assume that payments will not continue.

What are your goals and plans to use the monies?

I will build a house and set up accounts for 9 grandchildren for their education. and the balance will go to my five adult children upon my death.

What investments, spending, inheritance, gifts, charitable contributions, etc. are planned?

I will donate 10% of the monies to charitable organizations; I will take an extended voyage around the world on a ship with a companion for whom I will pay expenses; Funds will be used for charitable donations to projects I support and loans for small businesses for villages in Africa for which their is already an organization in place as well as donate animals to another such organization to provide for families to provide the ability to produce other animals and food; additionally a fund will be set up for local families in need of assistance for health care, food, clothing, or other financial assistance for which they have no resources. I will add money to the investment annuities I currently hold valued at approximately $300,000.00.

Do you have a need or desire to have more than the annual payment for some purpose prior to year 30?

I have no need for the final payment however at 62, I would be 92 before I would receive it.

Based on your goals it does not appear that you could do all that you wish to do with only the annual payment of 225,000 so that alone may dictate that you want the lump sum.

If we assume you will not get all of the payments it can be calculated how long you have to get the annual payment to equal the lump sum.

Rough tax computations (leaving out your other current income) is that the annual payment of 225K would be taxed, at 2009 rates, at about 34,400 for a net after tax for comparision of about 190,000 per year.

The lump sum would incur about 1,227,000 tax for a net of about 2,512,000 total.

Without including the return on investment on unspent awards, it would take more than thirteen years at 190K per year to equal the 2,512K after tax lump sum.

Since you say that you may even use funds each year in addtion to the annual payment we will assume no return on unspent funds from the annual payment. Using a 5% return on the 2,512K lump sum (less an first annual 190K spent) you would have a bit more than 116K investment earnings in the year on the balance after the lump sum was received. These investment earnings would extend the period it would take to have the annual payment be equal the lump sum to something more like 20 year than 13 years. Exact figures would only be available if we know just how much you would spend each year and your actual earnings on the balance.

So, based on both your desire to use more than the annual payment and the assumption you will not receive any monies after your death the data says you will have to live more than twenty years for the annual payment to exceed the lump sum after taxes.

I hope this helps for rough estimates of after tax return on the annual as compared to the lump sum.

Bless you for including charitable contributions in your goals.

Best wishes.

Edited by John Gordos EA on 11/10/2009 at 3:49 PM EST

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