Physical Injury
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.
If you receive a settlement for personal physical injuries or physical sickness, and you did take and itemized deduction for Medical Expenses 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.
Personal Property
Property settlements for loss in value of property that are less than the adjusted basis of your property are
not taxable and generally do not need to be reported on your tax return. However, you must reduce your
basis in the property by the amount of the settlement.
If the property settlement exceeds your adjusted basis in the property, the excess is income. For
more information, see the Instructions for Schedule D, (Form 1040) Capital Gains and Losses and the
Instructions for Form 4797, Sales of Business Property.
