Compensation Basis Disadvantage
Hi, May I know what does "Interfere with INTENTIONAL Gov't Tax Break for Injured Party" mean?
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Hi, May I know what does "Interfere with INTENTIONAL Gov't Tax Break for Injured Party" mean?
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A tax break means relieving an obligation for an individual to pay tax. If you are providing compensation on a gross basis, this means they essentially get the "full" amount (i.e. tax break) whereas providing compensation on a net basis essentially means they are still "paying" taxes even when injured
I still quite not understand why on gross basis having tax break, whereas on net basis still need to pay the tax? Am I understanding this correctly?
Let's say you make 10K a year and taxes are 20%. Your take home pay is 8K a year. You get injured and now your compensation is 10K a year. Basically you are receiving more than you would have had you not been injured because you are receiving your gross pay rather than your net pay as benefits. This 2K difference is the "tax break" being referred to here
I think I got what you mean. So basically it means after the reform the 2K may become Intentional that is as if the Injured Party need to pay tax. Is it what trying to say? Thanks T1!
Very simply - he will get more money if he is injured and that may be kind of intentional from the govt because well he is injured
You can call that a tax break
Hi @Staff-T1, in your example, the victim can take home the entire gross income of 10k? I thought the income replacement is only a % of the gross income? I actually see in F2016Q2d), the exam report also seems to indicate that the plaintiff can be compensated for the total gross income, can you please confirm? Thanks!
Yeah the plaintiff can be compensated for the total gross income - I think it can also be like 70% or smth ~ 100% if also a % of gross income
Hi @Staff-T1, so basically the 10k i make before injury is subject to 20% tax, while after injury, I don't need to pay any taxes on the compensation i get. Is my understanding correct?
Yes that is correct
thanks!
Hi @Staff-T1 looking at this, after some quick research it looks like income related court decision are taxable, so shouldn't the victim be awarded the gross amount of 10k in your above example considering they will be paying income tax on this?
According to the paper in the last paragraph where this is discussed, they do not. Unless you are referring to a case after this paper was written that sets precedence? The argument in this paper is that they should receive after tax amounts as compensation where they are currently receiving gross payments. However, if new precedence was set after 2005, I would definitely not base any answers on legal cases that are not explicitly quoted in the syllabus as your graders are actuaries and not lawyers and while a provided answer may be correct based on the latest information, it would probably get marked wrong