See IRS Publication 5345 for information on personal injury settlements - https://www.irs.gov/pub/irs-pdf/p4345.pdf
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.
