September 17, 2014 Recap

Interesting she decided to take the annuity. Is she the first one to do that?

It's worth noting that Sarah may have to pay out more taxes in the long run by doing so. Bear in mind I'm no tax expert (I just produce for a radio news show about business and the economy), so if you're in the rare but enviable position to consider this, consult your accountant above anything else.

With that being said...

Lump sum payment, according to my contestant paperwork, is $725,000, payable when a regular contestant would receive his/her winnings normally. That $725K is taxed in the year that it's won. So, let's assume the tax rate on game show winnings is 35 percent (not the actual number, I made it up).

The math is simple: 35 percent of ($725K + her maingame winnings of $17,490) means Sarah would have paid out about $260,000 in federal taxes if she took the lump sum. (I'm not taking into account state taxes for the sake of simplicity.)

While the annuity pays out the full $1,000,000, it's spread out over 20 years--so, $50,000 a year. Every $50,000 is taxed in the year in which it's paid out.

BUT...

...tax rates are never a constant thing. Let's assume once again that the federal tax rate on such winnings is 35 percent. When Sarah gets her maingame winnings plus the first $50,000 of her million dollar prize, she'll be taxed on $67,490 at 35 percent this year. (If you're doing the math at home, that's $23,621.50.)

But say, halfway through her annuity payments, in 2024, the tax rate goes up to 40 percent for some reason. She's already paid ($50,000*35 percent)*9 + $23,621.50 = $181,121.50 in taxes by this point. For the next 10 years, assuming the tax rate doesn't change over those next 10 years, the other $500,000 of her prize is taxed at the higher rate of 40 percent. Which means she's paying another $200,000 in taxes over the next 10 years ($20K per year assuming 40 percent tax rate), assuming the tax rate doesn't change over those 10 years.

So, assuming these numbers, she'll have paid a grand total of $381,121.50 in federal taxes alone. And that's not even taking MD state taxes into account or irregular yearly tax rate changes...which means that $381K figure could potentially be higher.

Lump sum tax figure of about $260,000 < Annuity tax figure of $381,121.50, assuming a rate increase after 10 years

Of course, I'm not taking into account factors such as what Sarah actually does with the money...she could get some nice returns on investment as the annuity is paid out. I found a Business Insider article from last year (2013) that puts it into a multi-million dollar context (lottery winnings), but I think it could very well be applicable here as well.

It could also be that I'm just spewing a bunch of nonsense and just wanted to sound smart for once, so do keep that in mind.