re: Question about settlement and taxes

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Personal physical injuries or physical sickness

• If you receive a settlement for personal physical injuries or physical sickness and did not take an
itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount
is non-taxable. Do not include the settlement proceeds in your income.

BUT

• If you receive a settlement for personal physical injuries or physical sickness, you must include in
income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to
the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you
paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical
expenses to each of the years you paid medical expenses. See Recoveries in Publication 525 for
details on how to calculate the amount to report. The tax benefit amount should be reported as “Other
Income” on line 21 of Form 1040.

Emotional distress or mental anguish

• The proceeds you receive for emotional distress or mental anguish originating from a personal physical
injury or physical sickness are treated the same as proceeds received for Personal physical injuries or
physical sickness above.

BUT

• If the proceeds you receive for emotional distress or mental anguish do not originate from a personal
physical injury or physical sickness, you must include them in your income. However, the amount you
must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress
or mental anguish not previously deducted and (2) previously deducted medical expenses for such
distress and anguish that did not provide a tax benefit. Attach to your return a statement showing
the entire settlement amount less related medical costs not previously deducted and medical costs
deducted for which there was no tax benefit. The net taxable amount should be reported as “Other
Income” on line 21 of Form 1040.