ExpertHard1 markMultiple Choice
CPA · Question 19 · Area IV: Individual Taxation
Which of the following items is EXCLUDED from gross income for federal income tax purposes?
Which of the following items is EXCLUDED from gross income for federal income tax purposes?
Answer options:
A.
Unemployment compensation
B.
Damages received for personal physical injury
C.
Punitive damages received in a personal injury lawsuit
D.
Interest received on U.S. Treasury bonds
How to approach this question
Recall IRC §104 exclusions. Physical injury = Tax Free. Punitive = Taxable.
Full Answer
B.Damages received for personal physical injury✓ Correct
B
Under IRC §104(a)(2), damages received (whether by suit or agreement) on account of personal physical injuries or physical sickness are excluded from gross income. Punitive damages are taxable. Unemployment compensation is taxable. Interest on U.S. Treasury bonds is taxable for federal purposes (though exempt from state tax).
Common mistakes
Thinking punitive damages are tax-free because they relate to an injury.
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