The Form 1099-R must be entered as received. If she's able to work part time, that might imply that she does not qualify for the disability exception to the early-distribution penalty on this retirement distribution. For the purpose of the disability exception to the early-distribution penalty, she is considered disabled if she can furnish proof that she can't do any substantial gainful activity because of her physical or mental condition. A physician must determine that her condition can be expected to result in death or to be of long, continued, and indefinite duration. This would also be considered disability income if the payer used code 3 in box 7 of the Form 1099-R.
Her out-of-pocket medical expenses should be included on Schedule A line 1.
Someone else will have to comment regarding state taxes; I not familiar with GA.
