In 2013,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,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages; therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 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?
A)Amber's offer is $20,000 less.($50,000 + $90,000 + $70,000 - $100,000 - $90,000).
B)Amber's offer is $7,000 less.[($50,000 + $90,000 + $70,000 - $100,000 - $90,000)´ .35)].
C)Amber's offer is $4,500 more.{$190,000 - ($50,000 + $90,000)+ [$70,000 ´ (1 - .35)]}.
D)Amber's offer is $22,000 more.[($190,000 - $210,000)+ ($120,000 ´ .35)].
E)None of the above.

Question

Quizplus · Accepted Answer

Khalid's original claim includes $70,000 in punitive damages, which are taxable. The after-tax value of punitive damages is $70,000 * (1 - 0.35) = $45,500. Khalid's original claim after tax is $50,000 + $90,000 + $45,500 = $185,500. Amber's offer is $100,000 + $90,000 = $190,000. The after-tax difference is $190,000 - $185,500 = $4,500 more.

In 2013,Khalid Was in an Automobile Accident and Suffered Physical