Final answer:
True, severance pay and payments due to the cancellation of an employment contract must be included as income. These are typically seen as taxable wages by the IRS and should be reported on an individual's tax return.
Step-by-step explanation:
The answer to the student's question is: True. Severance pay and any other payments received due to the cancellation of an employment contract do indeed need to be reported as part of an individual's income. This is generally because the Internal Revenue Service (IRS) considers severance pay as taxable wages. Employers typically report these payments on your W-2 form, which you then must include when you file your tax return for that year. It's important to consult with a tax professional for the specifics because tax laws can be complex, and there may be different rules based on individual circumstances or changes in tax law.
As for payments received due to the cancellation of an employment contract, they are also considered part of your income and may therefore be subject to taxes. Depending on the nature of the payment, it may be classified differently for tax purposes. For instance, compensatory damages for lost wages are generally taxable, whereas a portion of damages for emotional distress might not be. Once again, seeking the guidance of a tax advisor is valuable to ensure proper compliance with tax regulations.