During the Current Year, Khalid Was in an Automobile Accident

Multiple Choice

During the current year, 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 after­tax 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.