Julie was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm Medical expenses Loss of wages Punitive damages $200,000 20,000 10,000 100,000 $330,000 Instead, The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages. the company offers to pay her $300,000 for damages to her arm and $20,000 medical expenses. Assuming Julie is in the 30% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)? Hint: Discuss the amount that could be taxable and calculate the after-tax value of the income vs. the settlement.

Julie was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm Medical expenses Loss of wages Punitive damages $200,000 20,000 10,000 100,000 $330,000 Instead, The defendant's insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages. the company offers to pay her $300,000 for damages to her arm and $20,000 medical expenses. Assuming Julie is in the 30% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)? Hint: Discuss the amount that could be taxable and calculate the after-tax value of the income vs. the settlement.

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter5: Gross Income: Exclusions

Section: Chapter Questions

Problem 35P

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Winny, who is in the 25% marginal tax bracket, was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm $300,000 Medical expenses 50,000 Loss of Wages 10,000 Punitive damages 100,000 $460,000 The defendant’s insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages. Instead, the company offers to pay her $400,000 for damages to her arm and $40,000 medical expenses. Would you recommend that Winny accept the offer? Explain why or why…
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