If you receive a 1099, there are two options to deal with it in TurboTax. One is to enter the 1099, and then enter an offsetting item of negative income in the “other income” section with an explanation such as “correction for nontaxable 1099.“ You will e-file without attaching any supporting documentation. If the IRS later send you a letter, you would send them the details.
The other option is to leave the 1099 off of your return and filed by mail. Attach a copy of the 1099 and a brief written statement explaining why this does not represent taxable income to you. Do not send detailed proof, but keep the detailed proof with your important financial records for at least three years in case of audit.
The other concern to raise is that money that is gifted directly to pay for someone else’s medical expenses is never a charity donation, even if the person is needy. Hopefully you were not giving donation receipts that indicated this was a tax deductible medical or charity donation, if you did, you could be in serious difficulty later.
