Assume the same facts as in Problem 7-35. In addition, assume that in 2014, Angela receives an additional $7,000 in a settlement of a lawsuit arising because of the snow-skiing accident. $4,000 of the settlement is to pay Angela's medical bills, and $3,000 is to reimburse her legal expenses. What is the proper tax treatment of this $7,000 settlement?
In problem 7-35
Doctor bills ............................................. $11,700
Hospital bills ........................................... 9,400
Legal fees in suit against ski resort .................. 3,000
Angela is single and has no dependents. For the year, her salary is $58,000. She pays $600 in medical and dental insurance premiums, which is withheld from her paycheck on an after-tax basis, $2,750 in mortgage interest on her home, and $1,200 in interest on her car loan. Her health insurance provider reimburses her for $10,000 of the medical expenses.