Assume the same facts as in Problem I:7-35. In addition, assume that in 2017, 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?

Data from problem I:7-35

Item                                                                 Amount
Doctor bills......................................................$11,700
Hospital bills........................................................9,400
Legal fees in suit against ski resort..................3,000