Intuit Academy Tax Practice Exam

Which of the following types of income is considered non-taxable?

1. An inheritance from a relative

2. A cash prize from a contest

3. A bonus from an employer

4. Interest from a savings account

The correct answer is: An inheritance from a relative

An inheritance from a relative is considered non-taxable income for federal income tax purposes. This means that when an individual receives an inheritance, they do not have to report it as taxable income on their tax return. The rationale behind this provision is that an inheritance is seen as a transfer of wealth from one individual to another rather than income earned through work or investments. Therefore, the government does not impose income tax on this type of financial benefit. In contrast, other options such as a cash prize from a contest, a bonus from an employer, and interest from a savings account are typically taxable. Cash prizes from contests are considered lottery winnings and are subject to income tax. Employer bonuses are treated as wage income and are therefore fully taxable as well. Interest earned from a savings account is considered unearned income and is also subject to taxation.