Question

During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?a. Amber’s offer is $20,000 less. ($50,000 + $90,000 + $70,000 – $100,000 – $90,000).b. Amber’s offer is $7,000 less. [($50,000 + $90,000 + $70,000 – $100,000 – $90,000) × .35)].c. Amber’s offer is $4,500 more. {$190,000 – ($50,000 + $90,000) + [$70,000 × (1 – .35)]}.d. Amber’s offer is $22,000 more. [($190,000 – $210,000) + ($120,000 × .35)].e. None of these.

Answer 1

c. Amber’s offer is $4,500 more. {$190,000 – ($50,000 + $90,000) + [$70,000 × (1 – .35)]}.

Step-by-step explanation:

Step 1. Given information.

Amber offer = 190.000

Claiming= $50.000

Loss of income = $90.000

Punitive damages = $70.000

Step 2. Formulas needed to solve the exercise and Step 3. Calculation.

Original claim = ($50,000 + $90,000) + [$70,000 × (1 – .35) = 185,500

Step 4. Solution.

Difference = 190000 - 185500 = 4500

punitive damages only taxable