The Development and Solution of a Tax-Adjusted Model for Personal Injury Awards

The inclusion of an income tax analysis in the calculation of the present value of loss of earning capacity in wrongful death or personal injury cases has been encouraged by recent judicial decisions. A detailed model is presented that is capable of dealing with the variable tax rates involved. This tax-adjusted model, developed to estimate lost earnings, is far more complex than the no-tax model, partly because of the progressive nature of the income tax and the need to consider the tax on the interest generated by an award. The tax-adjusted lump sum equivalent must earn enough aftertax interest to allow for payout of the aftertax wages. This lump sum should be fully consumed after the final payout of wages. A procedure is detailed that generates all of the unknown elements needed to find the tax-adjusted lump sum equivalent award.