Which of the following is an example of nontaxable income?

Federal income tax refunds are classified as nontaxable income because they represent the return of money that you had previously paid to the government. When you file your tax return, you may realize that you overpaid your taxes in the previous year. The refund you receive is not considered income for the current tax year since it merely reflects a correction of previous overpayments rather than new earnings or profits.

This distinction is crucial in tax regulations, as only income that contributes to your financial gain or wealth accumulation is taxable. The other options, such as taxable rental income, prizes won in a contest, and wages from employment, all contribute to the taxpayer's overall income and are thus subject to taxation. Understanding what constitutes taxable versus nontaxable income helps individuals accurately report their earnings and minimize their tax liability.