Question

In 2009, 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, $25,000 for loss of income, and $100,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $120,000 for pain and suffering, $25,000 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

Answer 1

$5,000

Step-by-step explanation:

Amber offer = 120,000 + 25,000 = $145,000

Original claim = ($50,000 + $25,000) + [$100,000 × (1 - 0.35) = $140,000

Difference = $145,000 - $140,000 = $5,000

So, the after-tax difference to Khalid between Khalid's original claim and Amber's offer is $5,000