Question

Which of the following items should be properly excluded from gross income (i.e., included as part of gross income then subtracted as an exclusion)? (Choose all of the correct answers.) Interest received from state-issued bonds Foreign-income earned of $26,000 when the taxpayer was out of the country for 342 days during the year Forgiveness of the mortgage on a taxpayer's personal residence when he was insolvent before and after the forgiveness Lawsuit damages meant as a replacement of lost income Punitive damages from a lawsuit

Answer 1

Following are options that are properly excluded from gross income (i.e. included as part of gross income then subtracted as an exclusion :

1. Interest received from state issued bonds : According to Internal Revenue Service, interest on state or local government obligation is tax exempted. Since tax-exempt interest is not subject to income taxes, it is not included in the calculation of adjusted gross income (AGI) for taxation purposes. Issuers or lenders that pay more than $10 in tax-exempt interest must report the interest income to both taxpayers and the IRS on Form 1099-INT

2. As per IRS, any foreign income not excess of $105,900, where taxpayer was present in foreign country physically for excess of 330 full days in any 12-month period that begins or ends in the tax year in question, is exempted from tax.

3.  Taxpayer whose mortgage has been forgiven, but remains an insolvent, then that person may not be obligated to pay taxes on all or part of forgiven debt. Insolvency will only be considered when the borrower’s total debt exceeds the market value of his/her assets

4. lawsuit damages meant as a replacement of lost income is considered as taxable income, as it would have been taxed if there wan no lawsuit.

5. most of punitive damages from a lawsuit are also taxable income.