With a grand prize of $1,000,000 dollars promised to the winner, the America’s Got Talent franchise has been reeling in viewers and ratings for eleven seasons, and is still going strong. Its success has been built on the combination of amazing talent, celebrity judges, audience voting, and of course, the allure of the $1,000,000 grand prize to the winner.
It’s one of the few shows we like to watch as a family. The talent really is impressive and the humor is generally family friendly. My kids (ages 14 and 16) invariably get super-excited as the finale draws near, and the suspense builds to see who will win the $1,000,000 grand prize.
I’ve seen the looks on their faces when the show mentions the $1,000,000 grand prize. The kids fantasize about what they could do with that kind of money. They would be millionaires, right? Of course they would. If you win a million bucks, then by definition, you must be a millionaire. They could buy a fancy sports car or travel around the world – the possibilities are limitless!
For a child, and many adults for that matter, a million dollars sounds like the answer to all of your dreams and an end to all of your problems. There’s something about that nice, even, seven-digit number that has a mystical appeal – one million dollars…
Reality Sets In
You can imagine my kids’ confusion, when a few episodes ago, I noticed the small print that flashed on the screen at the end of the episode. What had I just seen flash by? Something about the prize? We had to stop the show on our DVR and rewind. It took a minute to pause at just the right point and read it properly.
I read the fine print aloud, “the prize, which totals $1,000,000, is payable in a financial annuity over forty years, or the contestant may choose to receive the present cash value of such annuity.”
The kids were flabbergasted. What did all of that mean? How can they say they are giving you a million dollars if it takes them forty years to do it? I had to investigate.
How Much They Receive
So even though the producers tout the million dollar grand prize throughout every episode, it turns out that the winner doesn’t actually receive a million dollars, at least not anytime soon. Winners have two options in how to receive their award.
First, they can receive the million dollars divided evenly over 40 years, which is $25,000 per year before taxes. If you assume they have a day job already and are making $75k a year, then the prize money would be taxed at a marginal rate of 25%. So, they would receive $18,750 per year for 40 years after taxes. It’s better than nothing, but it’s not a million bucks. They may also end up paying state and local taxes on top of that.
Option two, they can receive the present value of $25k per year for 40 years. If we assume the annuity pays a fixed 5 percent interest rate, it would make the one-time payment worth approximately $450k. They are helped in this case by our low-interest-rate environment. With higher interest rates, present values go down.
If we assume again that the winner was already making $75k from their day job, then the prize money would be taxed as follows:
- the first $75k at a 25% rate
- the next $80k at a 28% rate
- the next $181k at a 33% rate
- the next $53k at a 35% rate
- the last $61k at a 39.6% rate
So, what’s their final tax bill? Approximately, $144k on the $450k prize with an effective tax rate of 32%. After taxes, they would actually receive about $306k. Again, not a bad prize, but not $1,000,000 either. They may have to pay state and local taxes on that money as well.
What Else They Receive
The winner also gets a headline show in Las Vegas, and that has value. They also receive the global exposure and celebrity status afforded to the show’s winners, which they definitely deserve. I also learned that they are compensated for some of their auditions, especially once they get to the later stages of the show. The details are sketchy as their contracts include confidentiality language, but some of the terms have been anonymously leaked over the years. So, it’s unlikely that they will end up destitute. But, will they end up as millionaires? Not right away.
Is it a Scam?
Back to my original question, is the America’s Got Talent’s $1,000,000 grand prize a scam? If you ask my kids, it is. I can explain the time value of money to them all day long and they just don’t care. I explained how $1,000,000 over forty years is only worth $450,000 in today’s dollars – again, they don’t care. According to them, if someone is supposed to win a million dollars, that person should receive a million dollars and be a bonafide millionaire, it’s as simple as that. There’s something to their logic.
They still get mad every time we watch the show. Whenever Nick Cannon mentions the million dollar grand prize, my kids yell, “$450k before taxes!” at the TV. They are still in awe of the talent that they see each week and love the show, but they seem a little jaded and particularly blame Simon Cowell as the producer for the fraud. They never liked him, even from the start, but now it’s worse that they understand about the grand prize money.
I suppose the contestants know the real story, although many probably do not understand the details. At least they are signing contracts that lay out all of the specifics of the grand prize. But what about the American public? I suppose that a grand prize of $450,000 before taxes just doesn’t have the same allure as the prospect of a cool million dollars, or the same ability to draw in viewers season after season!
Did you know that the winner of America’s Got Talent does not actually receive a million dollars? Do you think they are scamming the American public by claiming a grand prize of one million dollars?