Question

PROBLEM FOUR (5 pts. total) PART A (3 pts.) Christie sued a former client for a back injury she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $350,000 for her loss of future income, $190,000 in punitive damages because of the employer’s flagrant disregard for the employee’s safety, $130,000 due to emotional distress from the injury, and $17,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Compute Christie’s gross income from these transactions in 2019.

PART B (2 pts.) How would your answer to Part A change if the lawsuit was related to slander and defamation (as opposed to a back injury)? You can ignore the $17,000 of medical expenses in Part B.

Answer 1

Amount for her loss of future income = $3,50,000

Punitive Damages = $1,90,000

Amount for emotional DIstress = $1,30,000

Taxable income = $12,000

Christie must include in gross income the $190,000 of punitive damages received,$1,30,000 of amount for emotional distress from the injury and the $12,000 for the previously deducted medical expenses. also,

Under tax benefit rule Medical expense recovery is included in gross.

Therefore,

Christie's Gross income in 2020 = Punitive damages + Amount for emotional distress + Taxes

   = $1,90,000 + $1,30,000 + $12,000

= $3,32,000