How were these payments reported to you and your wife - 1099-MISC, W-2?
If this benefit was paid for "lost wages", then it is taxable.
Compensation for lost wages is intended to replace what you would have earned had you not been injured. If you don't make a complete recovery, you may also receive compensation for future lost wages.
Wages are always taxable, which means compensation for lost wages is also taxable.
