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 not.
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 not.
Proposal of Winny:
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
Total = $460,000
Since Damages, medical expenses and loss of wages are not taxable , so punitive damages will be taxable at 25%
therefore after tax proceeds = $460,000 - ($100,000 x 25%)
= $435,000
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