Insurance or other reimbursements of your medical costs reduce your potential medical deduction. Reimbursements for loss of earnings or damages for personal injuries and mental suffering do not have to be taken into account. A reimbursement first reduces the medical expense for which it is paid. The excess is then applied to your other deductible medical costs. See Example 1 below.
Generally, a cash settlement recovered in a personal injury suit does not reduce your medical expense deduction. The settlement is not treated as reimbursement of your medical bills. But when part of the settlement is specifically earmarked by a court or by law for payment of hospital bills, the medical expense deduction is reduced.
If you receive a settlement for a personal injury that is partly allocable to future medical expenses, you reduce medical expenses for these injuries by the allocated amount until it is used up.
Medical reimbursements for fake injury claims are treated as taxable income; see Example 2 below.