How to Calculate Annual Installments for a Lottery

You must take into account tax rates when calculating annual installments.

Most people would love to win the lottery, but they would not necessarily love all the work that follows. If you do not opt for a lump-sum payment, then you will have to settle for annual installments. While you might be tempted to just divide your total payment by the number of installment years, you need to also make deductions based on federal and state tax rates. Only then will you arrive at the value of money you will actually earn each year.

Step 1

Calculate your pre-tax annual installments by dividing your total earnings by the number of installments. Given winnings of $2 million and 20 installments, divide $2 million by 20 installments to get pre-tax annual installments of $100,000.

Step 2

Multiply your pre-tax annual installments by the federal tax rate to determine how much federal tax you must pay each year. Given a federal tax rate of 35 percent, multiply $100,000 dollars by 35 percent to get $35,000.

Step 3

Determine how much state tax you must pay each year by multiplying your pre-ax annual installments by your state tax rate. Given a state tax rate of 5 percent, multiply $100,000 by 5 percent to get $5,000.

Step 4

Subtract your yearly federal and state tax payments from your pre-tax annual installments to calculate your annual installments for the lottery. Given earnings of $100,000 and federal and tax payments of $35,000 and $5,000, respectively, subtract $35,000 and $5,000 from $100,000 to obtain winnings of $60,000 per year over a 20 year period.