J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

17.4 Reimbursements Reduce Deductible Expenses

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.

Personal injury settlements or awards.

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.

Fake claims.

Medical reimbursements for fake injury claims are treated as taxable income; see Example 2 below.

EXAMPLES

1. In 2012, Gail Hurz paid $2,400 in medical insurance premiums, $1,200 for doctor and hospital bills and $750 for prescription drugs. She received reimbursements of $1,175 from group hospitalization insurance ($800 for the doctor and hospital bills and $375 for the drugs.) Her adjusted gross income for 2012 is $32,100. If Gail itemizes, she can claim a medical expense deduction ...