B. In 2018, Barb, a cash basis taxpayer, was in an accident and incurred $8,000 in medical expenses, which she claimed as an itemized deduction for medical expenses. Because of a limitation, though, the expense reduced her taxable income by only $3,000. In 2019, Barb successfully sued the person who caused the physical injury and collected $8,000 to reimburse her for the cost of her medical expenses. Barb was in the 22% marginal tax bracket in 2018 and in the 12% bracket in 2019. What amount, if any, will Barb include in her 2019 gross income?

$3,000

Explanation:

As a general rule, the IRS does not tax award settlements for personal injury lawsuits. But in this case, since Barb had already filed a $3,000 income deduction last year for her medical expenses, then she must include the same amount as income during this year.

If she hadn't filed any deduction, then the proceeding from the lawsuit wouldn't have been taxed.

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