Final answer:
A damage deposit returned to a taxpayer is not included in gross income as it is a return of money initially provided as a guarantee against potential damages or non-payment of rent by the tenant.
Step-by-step explanation:
The question pertains to whether a damage deposit recovered by a taxpayer from an apartment rental should be included in gross income. In general, a security or damage deposit that is returned to a tenant is not considered income, because it is a return of money that the taxpayer initially paid to the landlord. The deposit is merely held as a guarantee against damage or non-payment of rent. If no damages occur, the money is returned, and there is no income to declare. However, if any part of the deposit is kept by the landlord to cover damages or unpaid rent, then the amount returned to the tenant would not be income. The returned portion has not been earned by the tenant; it is simply a return of their own money.