Senior Tax Specialist Practice Exam

Certain types of gifts or inheritances are generally not taxable to the recipient due to the principles of gift and estate tax laws. When an individual receives a gift, the donor is usually the one responsible for any gift taxes owed, provided the value of the gift exceeds the annual exclusion limit set by the IRS. Thus, the recipient does not have to include the value of the gift in their income for tax purposes.

Similarly, inheritances are also typically not subject to income tax. The IRS treats inherited property as a transfer of wealth rather than an income-generating event. While the estate of the deceased may be subject to estate taxes depending on its value, the beneficiaries do not report the inheritance as taxable income when they receive it.

In contrast, wages from employment, interest income, and rental income are classified as taxable income. Wages and salaries are earned from work and are subject to income tax. Interest income is earned from financial instruments and investments and is also taxable. Rental income comes from leasing property and is taxable as it represents profit from an individual's investment property.