Here is more specific information on my previous question: My daughter could not have the money until she turned 18. When she turned 18 she cashed out the annuity being a death benefit inheritence and took the money and put it away in a savings account for college. At the end of the 2009 year she was sent a 1099-INT form with gross disb. being $50, 219.00 (box 1) and taxable amount being $27,525.00 (2a). This was the only income she had and we paid over $5,000.00 in IRS taxes. Now after talking with others (not accountants) I’m being told that since this was an inheritance it was supposed to be tax free up to $100,000.00. We all are in Calif.

Only the portion that already existed when the death occurred is an inheritance. That is the only part that is tax-free. The taxable amount is the portion that was added during the years between the death and now, which is not an inheritance and is not tax-free.

purposes?

Since winnings are taxed as ordinary income, would it matter how you elected to receive it? Would it be better to go with the current tax rate for that much money, or take a gamble on the top rate being lowered some years down the road? Because the top marginal rate is going to be at least 39.6% starting in 2011 (not sure how many years it will be in effect). But the top rate now is 35% on income that is over $373,650, plus $108,421.25.

So I figured that amount would come to $34,869,222.50 + $108,421.25=$34,977,643.75.

And SS tax is 6.2% on the first $106,800 ($6,621.60) and Medicare tax is 1.45% (1,450,000).

That comes to about $36,434,265.35 not including state tax (if the its paid in that state).

That’s about 36% total. My numbers may be off, but just assuming you could walk away with a little over $60,000,000 right now, would it be better to take that or (let’s assume) $5,000,000 (pre-tax) for 20 years?

I would take the annuity certain over a lump sum. But not for tax reasons.

If you take a lump sum, they only pay you the present value of the annuity certain. At today’s interest rates, that’s around half of the gross amount. Since you are getting a discounted payout up front on the lump sum, inflation is largely a wash. In fact, if the 20-year rolling averages on inflation hold true, and there’s little reason to think that they won’t, you may even come out a bit ahead with the annuity certain.

From a tax perspective the savings will be minimal with the annuity certain. Taking the annuity does shift more of the income each year into lower brackets, but with a win that large you’ll be looking at the difference in net rates of between 34.2% and 34.5%. That does assume that rates stay static at their current levels of course, which is unlikely given the status of the deficits, but there’s no way to accurately predict future tax rates. Assuming that you took the lump sum and invested it wisely you’d still be hit with the increased taxes on the future income that it generated. Another wash on taxes.

None of that would influence my decision significantly though. What my decision is based upon is what happens to most people who have a win that large and who take the lump sum. Most of them wind up broke and bankrupt in a few years. With the annuity certain the odds of that are greatly reduced.

Many lump-sum winners give away a lot of their winnings to friends and family, blissfully unaware of the gift tax consequences of doing so. More than one has given away more than half of their winnings, only to be slammed by the IRS for every remaining penny. Gift taxes run as high as 55%. It does not take a mathematical genius to figure out that if you give away half, you won’t be able to pay the tax bill with the remaining funds. Some folks who took the annuity certain did run into financial trouble in the first year or two, but learned from their mistakes while they could still afford to get back on an even keel and did quite well in the out years.

The claim that you are depending upon the state to stay solvent in order to collect the annuity certain is pure FUD from someone with no financial savvy. The annuity is not paid directly by the state, but with proceeds from an actual annuity contract purchased from a highly-rated commercial insurance company. Many states now break the contracts up among several carriers as a hedge against one carrier going bust as AIG nearly did. For you to lose out would require that all of the insurance companies AND the state all became insolvent. If things ever get THAT bad, the guy who took the lump sum is probably going to be as broke as you are, even if he invested it wisely. And contrary to what that respondent claims, no state has gone bankrupt since the Civil War. A few cities have in the past 50 years, most notably New York and Miami, but no states have.

Note: Social Security taxes only apply to earned income. You would not pay any FICA taxes on a lottery win, regardless of how you took the payout.

Midtem Examination
Spring2009
ACC501 Bussiness Finance

Question No:1 (Marks:1)-Please choose one
The debt of a firm has (as a percentage of assets);the is the degree of financial leverage.
More;Greater
LessP;Greater
More;Lower
None of the given options
Question No:2 (Marks:1)-Please choose one
Which one of the following is(are) the non cash-item(s)?
Depreciation
Deferred Tax
Both depreciation and deferred tax
Neither depreciation nor deferred tax
Question No:3 (Marks:1)-Please choose one
Which of the following is the extra rate you would pay if you earn one more dollar?
None of the given options
Average Tax Rate
Marginal Tax Rate
Flat Tax Rate
Question No:4 (Marks:1)-Please choose one
which one of the following is NOT an investing cash flow?
Proceeds from the sale of a retained asset
Purchase of a delivery vehicle
Sale of a machinery
Purchase of inventories
Question No:5 (Marks:1)-Please choose one
The balance Sheet reported a beginning balance of Rs 23,000 in Accounts Receivable and an ending balance of Rs 16,000.The income statement reported sales revenue of rs230,000.Using this information what will amount of cash collected from customers?
Rs269, 000
Rs253, 000
Rs237, 000
Rs230, 000
Question No:6 (Marks:1)-Please choose one
What would be the amount of current assets for a company if the compant would has a current ratio of 4:1 and net working capital; of Rs.30,000?
Rs 6,000
Rs 10,000
Rs 24,000
Rs40,000
Question No:7 (Marks:1)-Please choose one
Which of the following is(are) True regarding Du pont identity?
The decomposition of ROE is a convenient way of systematically way of approaching the financial statements analysis
Du pont identity tells where to start looking for the reasons if ROE is unsatisfactory by some measure.
The du pont identity tells you that ROE is affected by three things i.e operating efficiency,asset use efficiency and financial Leverage.
All of the given options
Question No:8 (Marks:1)-Please choose one The Present value of a sum of Rs. 100 to be received in the future value will be:
Less than Rs.100
None of the given options
More than Rs.100
Equal to Rs .100
Question No:9 (Marks:1)-Please choose one
You just won a prize,you can either receive Rs 950 today or Rs1000 in one year.Which option do you prefer and why if you can earn 8 percent on your money?
Rs 950 because it has the highest future value
Rs 950 because you receive it sooner
Rs 1000 because it ismore than Rs .950
Either because the both options are of equal value
Question No:10 (Marks:1)-Please choose one
Which one of the following is thw correct formula to calculate present value of annuity?

Question No:11 (Marks:1)-Please choose one
What will be the annual payment on a 6-year Rs.14000 that carries a 7 % interest rate?
Rs.2816
Rs.2973
Rs 3088
Rs3277
Question No:12 (Marks:1)-Please choose one
How much be deposited at 15% each of the next 7 years to have Rs 4565?
RS 452.75
Rs 570.50
Rs 350.20
Rs 412.50
Question No:13 (Marks:1)-Please choose one
Which of the following is a special case of annuity,where the streams of cash flows continues forever?
Special Annuity
Ordinary Annuity
Annuity Due
Perpetuity
Question No:14 (Marks:1)-Please choose one
Which of the following represent(s) a loan made by the investors to the issuer?
Bond
Common Stock
Preferred Stock
All of the given options
Question No:15 (Marks:1)-Please choose one

Are you SERIOUSLY posting your ENTIRE midterm exam on the internet so that others can do it for you? Good luck in life.
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The answer to #13 is Perpetuity. (Do you not have a textbook or ever study?)