The lottery is a way for governments to raise money by selling tickets with numbers that are picked at random. Usually, the prizes are big amounts of cash.
Despite the popularity of the lottery, it can be a costly game to play. In addition to hefty taxes, a significant portion of winnings goes to the state and federal government. And many people who win the jackpot go bankrupt in a few years because they spend it on things they should have been saving for.
Lottery Funds for Education
The Lottery contributes to a variety of public education organizations throughout the state of California, based on funding provided by lottery sales and the Average Daily Attendance (ADA) of school districts. Additional funding is dispersed to statewide educational systems such as the University of California and the California State University system.
A good source of information on the lottery’s funding for education is the quarterly reports filed by the California State Controller’s Office, which can be viewed below. These reports list all of the school districts and statewide educational systems that have ever received Lottery funds.
Taxes on Winnings
Most lottery winners pay 24 percent in federal taxes when they file their income tax returns, unless they choose the lump sum option. And if they live in a state with higher taxes, their winnings might be taxable as well. In fact, if you win a $10 million prize and choose the lump sum option, you’ll end up with about $2.5 million after paying the taxes.
Some lottery winners also have the option to sell their periodic payments. These payments are made over time, so if you choose the lump sum option, it’s important to know whether you can sell your periodic payments and what you’ll get for them.
You’ll want to consult with a lawyer before deciding on the option of selling your periodic payments. You’ll need to understand the state law that governs this type of transaction and determine if you can do it without violating any federal or state laws.
How the Lottery Draws its Money
In order to pay for the millions of dollars in payments that it makes annually, the New York Lottery buys U.S. Treasury bonds, STRIPS. These bonds are zero-coupon bonds, which means that they don’t pay interest. If the New York Lottery had bought ordinary bonds instead, the interest would have been about 5-percent a year.
Because the New York Lottery is required to make the annual payments to a specified number of winners, it must purchase a large amount of these bonds to cover all of its payouts. So, in order to get the funds needed to purchase these bonds, it must take a substantial lump sum from each winner.
This is why so many winners don’t opt for the annual payment plan. They believe that they can earn more by investing the cash than the estimated 5-percent interest that the bonds will earn.