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 $200,000 Medical expenses 30,000 Loss of wages 10,000 Punitive damages 100,000 $340,000

Answer 1

Barbara’s claim for punitive damages of $100,000 is the only taxable amount. Therefore, her after-tax proceeds from receiving the $340,000 would be $305,000 [$340,000 – .35($100,000)]. None of the offer from the insurance company ($340,000) would be taxable and therefore her after-tax proceeds from the settlement would be $340,000. Thus, both the insurance company and Barbara would benefit from her accepting the insurance company's offer.

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