If an individual annually receives both dividends and interest on dividends from a participating Life policy, the individual should include which of the following items in gross income for federal income tax purposes?

Dividends received from a participating Life policy are generally considered a return of premiums paid by the policyholder. This return of capital is not typically taxable as income but is rather a distribution of the policy's earnings back to the policyholder.

While the interest portion of the earnings is typically included in gross income for federal income tax purposes, dividends from a participating Life policy are usually treated differently. Including both the interest and dividends in gross income would result in potentially overestimating the taxable income generated by the policy.

Although dividends are not typically taxable, the interest component earned on dividends from a participating Life policy is considered taxable income for federal income tax purposes. Therefore, neither the interest nor the dividends can be completely excluded from gross income.