We did some research on this question for you, and here is what we found.
The IRS requires that disease and drug study payments be reported as income on personal tax returns. Reimbursements and payments based on receipts to cover expenses incurred by the participant, because of their clinical trial participation (such as travel costs) are excluded from this requirement. Such out-of-pocket expense reimbursements are not considered taxable income.
When cumulative payments over a calendar year equal or exceed $600, the participant should also receive a Form 1099-MISC, with the taxable research study payments listed in Box 3. Even in the absence of a Form 1099-MISC, income from participating in research studies is taxable compensation.
However, in an update to a 2009 law, a 2015 federal law known as the “Ensuring Access to Clinical Trials Act of 2015” allows patients with rare diseases to receive up to $2,000 in compensation per year, without having the $2,000 payment count as income that could jeopardize eligibility for Supplemental Security Income (SSI) and Medicaid.
What this means in practical terms is that the compensation itself is taxable for regular income tax reporting purposes, whether reported on a Form 1099-MISC or not; but that up to $2,000 of it won't count as income by the Social Security Administration (or other government agencies) for determining eligibility for other public benefits.
So, the answer to your question is that yes, unfortunately, the payments received by your wife do need to be included on your income tax return, and is subject to tax. Sorry.
To be very specific, the research study payments are classified as "other" income (not wages and not self-employment income), and should be reported on Line 21 of your Form 1040. Line 21 is also where jury duty pay, game show prizes, legal settlements, and other miscellaneous income is reported.
In TurboTax, this is relatively straightforward to do mechanically, but sort of difficult to describe all of the necessary steps. There is a TurboTax answer here, at the following link, that details the process:
However, if those steps are unclear, or you are unable to execute them for any reason, this is one of those instances where it may be beneficial to have a tax (and software) expert guide you through the actual data entry. It should only take a few short minutes, and we do have the ability to screen-share with your computer.
To generate a support ticket and talk to a live agent, please visit the webpage link below during regular business hours. During the tax season, we are also open 7 days a week. (The call is free to you).
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