Which of the following items is EXCLUDED from gross income for federal income tax purposes?

Answer options:

Unemployment compensation

Damages received for personal physical injury

Punitive damages received in a personal injury lawsuit

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

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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