Question

Research the tax treatment for each of the following income items:

1.  Rental income

4.  Amounts received from settlement of lawsuits or from court judgments.

          Specify the different treatment for:

(a) compensation for pain and suffering,

(b) punitive damage awards,

(c) compensation for mental and emotional distress,

(d) compensation for lost wages

5.  Discharge of Indebtedness Income

6.  Scholarships

Answer 1

1. Rental Income is taxable and rental expenses can be deducted from it like mortgage interest, property tax, operating expenses, depreciation, and repairs. Rental income includes Advance rent, Security deposits, Payment for canceling a lease occurs if your tenant pays you to cancel a lease.

4. (a) compensation for pain and suffering excluded from gross income because they are all compensation for Plaintiff’s physical injury.

(b) & (c)

Under section 104(a)(2), emotional distress is not treated as a physical injury or physical illness. Thus, damages for emotional distress itself, like punitive damages, are included in gross income. But those damages for medical care attributable to emotional distress remain excluded from gross income. So in general, amounts received under a judgment or settlement outside of personal physical injuries or physical sickness are includible in gross income. Punitive damages are always gross income.

(d) lost wages is in lieu of salary and is not excluded

5. Taxpayers in the United States may have taxconsequences when debt is cancelled. This is commonly known as COD (Cancellation of Debt) Income. According to the Internal Revenue Code, thedischarge of indebtedness must be included in a taxpayer's gross income.

6. A scholarship/fellowship payment received by a candidate for a degree is generally not taxable income to the student if it is used for "qualified expenses."

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