IRS Individual Taxpayer Data 3 — Questions and Answers
Question 1: A taxpayer sells their primary residence for a $300,000 gain. They are married filing jointly and have lived in the home for 3 of the last 5 years. How much gain is excluded from income?
- $250,000
- $300,000 (Correct answer)
- $500,000
- $0, since a gain exists
Correct answer: $300,000
Married filing jointly taxpayers can exclude up to $500,000 of gain on a primary residence sale if the ownership and use tests are met, so the entire $300,000 gain is excluded.
Question 2: Which form does an employer use to report wages paid and taxes withheld for employees?
- Form 1099-NEC
- Form W-2 (Correct answer)
- Form 1098
- Form 1096
Correct answer: Form W-2
Employers report wages, tips, and withheld taxes to each employee and the IRS on Form W-2.
Question 3: A taxpayer has a net operating loss (NOL) in 2023. Under current law, how many years can the NOL be carried forward?
- 5 years
- 10 years
- Indefinitely, subject to an 80% of taxable income limitation (Correct answer)
- 20 years with no limitation
Correct answer: Indefinitely, subject to an 80% of taxable income limitation
Under the Tax Cuts and Jobs Act, NOLs arising after 2017 can be carried forward indefinitely but are limited to offsetting 80% of taxable income in the carryforward year.
Question 4: A taxpayer receives a prize of $5,000 from a radio contest. How is this amount treated for federal income tax purposes?
- Excludable as a gift
- Includable in gross income as ordinary income (Correct answer)
- Taxable only if the taxpayer itemizes deductions
- Subject to capital gains rates
Correct answer: Includable in gross income as ordinary income
Prizes and awards are generally includable in gross income as ordinary income under IRC §74.
Question 5: Which of the following taxpayers may NOT use the single filing status?
- A taxpayer who has never been married
- A taxpayer who is divorced by December 31
- A taxpayer whose spouse died during the tax year and has no dependent child
- A taxpayer who is legally married as of December 31 (Correct answer)
Correct answer: A taxpayer who is legally married as of December 31
Filing status is determined on the last day of the tax year; a taxpayer who is legally married on December 31 must file as married (MFJ or MFS), not single.
Question 6: A taxpayer contributes $6,500 to a traditional IRA in 2023 and is covered by an employer retirement plan. Their AGI is $80,000 (single filer). What is the deductibility of this contribution?
- Fully deductible since it is under the contribution limit
- Partially deductible based on the phase-out range (Correct answer)
- Not deductible because they are covered by an employer plan
- Fully deductible regardless of employer plan coverage
Correct answer: Partially deductible based on the phase-out range
For 2023, single filers covered by a workplace plan face a phase-out range of $73,000–$83,000; at $80,000 AGI, only a partial deduction is allowed.
Question 7: A taxpayer who is self-employed pays $8,400 in self-employment tax. What deduction may they claim on their federal return?
- The full $8,400 as a business expense on Schedule C
- One-half of SE tax ($4,200) as an above-the-line deduction (Correct answer)
- None; SE tax is not deductible
- $8,400 as an itemized deduction
Correct answer: One-half of SE tax ($4,200) as an above-the-line deduction
Self-employed taxpayers may deduct one-half of self-employment tax as an above-the-line adjustment to income on Schedule 1.
IRS Individual Taxpayer Data 3
A taxpayer sells their primary residence for a $300,000 gain.
They are married filing jointly and have lived in the home for 3 of the last 5 years.
How much gain is excluded from income?