Question

Edna sued her former employer for a back injury she suffered on the job in 2016. As a result of the injury, she was partially disabled. In 2017, she received $250,000 for her loss of future income, $150,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $10,000 for medical expenses. Edna took the standard deduction in 2016 and 2017. Edna's 2017 gross income is:

a) $400,000

b) $250,000

c) $410,000

d) $10,000

Answer 1

Edna's 2017 gross income would include the $250,000 for loss of future income and the $150,000 in punitive damages, totaling $400,000 since these amounts are taxable under federal law. The $10,000 for medical expenses is not included as it is non-taxable.

Step-by-step explanation:

Edna sued her former employer and received several types of damages as a result of a back injury. In terms of gross income, Edna would need to include the amounts that are taxable under federal law. Generally, amounts received for physical injuries are non-taxable, while punitive damages are taxable. The loss of future income is typically taxable as it replaces wages. As such, this would be included in gross income. The $150,000 in punitive damages is also taxable because it serves as a punishment to the employer and is not compensatory for a physical injury. However, the $10,000 for medical expenses is tax-free if it is to reimburse for actual medical expenses. With this information, Edna's 2017 gross income would include both the loss of future income and the punitive damages, totaling $250,000 (future income) + $150,000 (punitive damages) = $400,000.