Question

1)During 2020, Kevin received the following items:

$5,000 unemployment compensation

$10,000 inheritance

$20,000 life insurance proceeds on account of mother’s death

How much is Kevin required to include in gross income?

2)

Len Landlord owns an apartment building. During the year he received:

Rent payments………………….$10,000

Security deposit………………...     2,500

Advance rent payment………….     5,000

How much must Len include in income?

Answer 1

1) Kevin will have to include only the $5,000 unemployment compensation in his gross income. Any unemployment compensation received from both State as well as Federal Govt. is taxable income. On inheritances, there is no Federal Govt. tax (inheritance tax is a state tax and is applicable in six states only— Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. The Federal Estate Tax is also exempt for an inheritance of estate upto $ 11.4 mn. Hence,the amount of Kevin's inheritance of $10000 need not be included. The proceeds of life insurance claims received as the beneficiary due to the death of the insured person, aren't includable in gross income and need not be reported.

2.  Len will have to include the following in his gross income in the year he receives the money

Rental Payments received $10000

Advance Rent Payments $5000

Total amount to be included by Len in his gross income is therefore $15000

The student must note the following important difference in respect of taxability in respect of security deposits:

Security deposit is not ordinarily considered rental income as it is intended to be returned at the time of vacation of the property by the tenant. However, if the renter retains or deducts any portion of the security deposit towards charges, damages, etc. at the time of vacation of the property, that becomes his income at that time.