Lotteries are generally operated by states to generate revenue for a variety of uses. Most states use lottery proceeds to fund schools and infrastructure. The odds of winning a lottery are extremely low, usually in the tens of millions to one. However, the lucky lottery winners often receive millions of dollars, either in a lump sum or paid out over many years (annuity). The state and federal governments levy a high tax on lottery winnings. The typical federal tax rate could be as high as 39.6 percent, and the state tax rates could be 10 percent to 15 percent, depending on the state.
Determine the amount of lottery money won and assume it is paid in a lump sum. For instance, a lottery jackpot might be $20 million, but before it is paid out, taxes must be calculated and paid to the government.
Determine the federal tax rate for lottery winnings. Assume the maximum tax bracket is used and the rate is 39.6%. Multiply $20 million by 0.396 for a federal tax payment of $7,920,000.
Determine the state tax rate for lottery winnings by assuming a state tax rate of 12%. Multiply $20 million by 0.12 for a state tax payment of $2,400,000.
Determine the actual lottery amount won by subtracting the state and federal tax payments from the gross lottery winnings. This is $20 million minus $7,290,000 and $2,400,000 for an actual payout of $10,310,000, or just over 50 percent of the jackpot.
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