The Price of a Lottery Jackpot

When people hear that a lottery jackpot is huge, they get excited. “Sizable jackpots generate enthusiasm because they allow people to imagine what their life would be like if they won,” an expert at the Menninger department of psychiatry and behavioral sciences tells Yahoo Life. That’s also why so many of us buy tickets: we feel the urge to try for a big win.

But big prizes come with a price. When a jackpot is so big that it becomes newsworthy, more people play the lottery, which in turn drives up ticket sales and the prize amount. That makes it harder for officials to estimate how much the winnings will be. “It’s like estimating the size of an iceberg—you don’t know how big it will be until it hits.”

In addition to being hard to calculate, a huge jackpot can lead to complicated tax situations for the winner. The federal government taxes all lotto winnings, and a large jackpot will probably move the winner into a higher tax bracket. Those withholdings could cut the prize by up to 37%. Then there are state taxes, which vary by jurisdiction.

But the biggest headache may be the wait for the prize money to arrive. Most lotteries offer the winner the choice of annuity payments or a lump sum. The annuity payments will probably be significantly lower than the advertised jackpot, because of the time value of money. The lump sum, on the other hand, is less exciting—but it should be enough to pay off most debt and start a new chapter in your life.