This is a taxable recovery, a reimbursement of a previous deduction. You must look at your 2022 return and use the tax benefit rule to determine if any part is taxable. Here is an example of how the tax benefit rule might work.
Suppose her income (AGI) was $50,000 and her medical expenses were $8000. 7.5% of $50,000 is $3750, so only $4250 of her medical expenses were deductible. Her total itemized deduction including the medical bills was $16,000. The standard deduction for single in 2022 was $12,950, so she got an extra $3050 of deductions more than the standard deduction. If she recalculates her 2022 tax return after subtracting the reimbursement, her new medical expense deduction is only $450. Her total itemized deduction would be $12,200. Since that is less than the standard deduction, she would have used the standard deduction of $12,950 on her tax return. That means that even though the reimbursement was $3800, the tax benefit from the deduction was $3050. So only $3050 is reported as taxable income now.
Note that if she paid the dentist with pre-tax or tax-free money such as an FSA or HSA, the calculation becomes a bit more complicated.
