In 2012, Chad was in an automobile accident and suffered physical injuries. The accident was caused by Orville's negligence. Chad threatened to file a lawsuit against Global Trucking Company, Orville's employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages. Global's insurance company will not pay punitive damages; therefore, Global has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Chad is in the 35% marginal tax bracket. What is the after-tax difference to Chad between Chad's original claim and Global's offer?
a. Global's offer is $19,500 less. [$30,000(1 - .35) = $19,500].
b. Global's offer is $30,000 less. (- $100,000 punitive damages + $70,000 increased pain and suffering.)
c. Global's offer is $5,000 more. [$70,000 - (1 - .35)($100,000) = $65,000].
d. Global's offer is $10,500 less. [($30,000 × .35) = $10,500].
e. None of these choices are correct.
Answer: c. Global's offer is $5,000 more. [$70,000 - (1 - .35)($100,000) = $65,000].