Question

Christie sued her former employer for a back injury she suffered on the job in 2017. As a result of the injury, she was partially disabled. In 2018, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2017 return, reducing her taxable income by $12,000. Christie's 2018 gross income from the above is:________

Answer 1

Christie's gross income for 2018, accounting for the lawsuit settlement, is $403,000. This includes $240,000 for loss of future income, $160,000 in punitive damages, and a taxable amount of $3,000 from the medical expenses previously deducted.

Step-by-step explanation:

The question requires an understanding of taxable income from lawsuit settlements under U.S. tax law. Christie's gross income for 2018 must include the settlement amounts minus any previously deducted amounts that are recovered tax-free. The $240,000 for loss of future income is typically taxable. However, the $15,000 for medical expenses is not taxable because these were already deducted from her 2017 return, which effectively makes only $3,000 ($15,000 - $12,000 previously deducted and thereby benefiting from a tax shield) taxable. The $160,000 in punitive damages is fully taxable as it is not related to personal physical injuries or physical sickness.

1. Future Income: $240,000
2. Punitive Damages: $160,000
3. Medical Expenses Recovered: $3,000 (Since $12,000 already benefited Christie on her 2017 return)
4. Total Gross Income: $240,000 + $160,000 + $3,000 = $403,000