VITA Certification Practice Test 2026 – All-in-One Guide to Master Volunteer Income Tax Assistance!

Gifts and inheritances are generally not taxable to the recipient, making them the correct answer in this context. When a person receives a gift, the IRS does not impose income tax on that amount. Similarly, inheritances received from an estate are not treated as income and do not incur income tax liability for the inheritor. Although there may be estate taxes that apply to the deceased's estate, the recipient does not need to report the inherited amount as income on their tax return.

Wages and salaries, as well as business profits, are considered taxable income under federal tax law. Interest and dividends are also taxable, as they represent earnings generated from investments. Therefore, the distinction here lies in the nature of the transfer: gifts and inheritances are transfers of wealth rather than income earned through work or investments, which is why they do not fall under taxable income.