Barbara was injured in an automobile accident. She has threatened to file a suit
ID: 2419151 • Letter: B
Question
Barbara 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 $150,000
Medical expenses 30,000
Loss of wages 10,000
Punitive damages 60,000
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 $210,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the company’s offer be more or less than the after tax proceeds from her proposed offer? Show all supporting calculations.
Explanation / Answer
Decision making whether, Barbara has to accept the company's offer or not :
Proposal of Barbara
Damages for 25 % loss of the use of her right arm = $ 150,000
Medical expenses = $ 30,000
Loss of Wages = $ 10,000
Punitive Wages = $ 60,000
Total = $ 250,000
Since Damages, medical expenses and loss of wages are not taxable , so punitive damages will be taxable at 35%
therefore after tax proceeds = $ 250,000 - ( $ 60,000*35%)
= $ 229,000
The offer given by insurance company is not taxable , so total amount to be received from insurance company according to its offer = $ 210,000 + $ 30,000 = $ 240,000
Since the amount offered by insurance company is more than barbara's proposal, so it is better for Barbara to accept the offer of Insurance company i.e to go for $ 240,000
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