CWMC Module 28: Taxes Competency Test

1.

Which of the following are strategies to help minimize taxes? (check all that apply)

A.

Reduce income
B.

Increase deductions
C.

Take advantage of tax credits
D.

Increase expenses

Correct Answer(s)
A. Reduce income
B. Increase deductions
C. Take advantage of tax credits

Explanation
The strategies to help minimize taxes include reducing income, increasing deductions, and taking advantage of tax credits. By reducing income, individuals can lower their taxable income, which in turn reduces the amount of taxes owed. Increasing deductions allows individuals to claim more expenses or deductions, further reducing their taxable income. Taking advantage of tax credits provides individuals with direct reductions in their tax liability. Increasing expenses, however, does not directly minimize taxes as it only increases the amount of money spent, not the amount of taxable income.

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2.

Which of the following can reduce the AGI on an income tax return? (check all that apply)

A.

Health savings account deduction
B.

Tuition and fees deduction
C.

Contribution to an IRA
D.

Student loan interest

Correct Answer(s)
A. Health savings account deduction
B. Tuition and fees deduction
C. Contribution to an IRA
D. Student loan interest

Explanation
The AGI (Adjusted Gross Income) on an income tax return can be reduced through various deductions and contributions. One way is through a health savings account deduction, where individuals can contribute pre-tax money to a health savings account, reducing their taxable income. Another way is through the tuition and fees deduction, which allows individuals to deduct eligible education expenses. Contributions to an IRA (Individual Retirement Account) can also reduce AGI, as they are often tax-deductible. Lastly, individuals can deduct student loan interest paid during the year, further reducing their AGI.

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3.

Which of the following can directly reduce gross taxes on an income tax return? (check all that apply)

A.

Credit for child and dependent care expenses
B.

Retirement savings contributions
C.

Education credits
D.

Dividend interest

Correct Answer(s)
A. Credit for child and dependent care expenses
B. Retirement savings contributions
C. Education credits

Explanation
The credit for child and dependent care expenses directly reduces gross taxes on an income tax return by allowing taxpayers to claim a credit for expenses incurred for the care of their dependents. Retirement savings contributions can also directly reduce gross taxes by allowing taxpayers to deduct contributions made to qualified retirement accounts. Education credits can directly reduce gross taxes by allowing taxpayers to claim a credit for qualified education expenses. Dividend interest, however, does not directly reduce gross taxes on an income tax return.

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4.

Which of the following best describes a professional tax advisor?

A.

Person specifically trained to prepare tax returns
B.

Certified Management Accountant
C.

Financial expert specifically trained in tax law
D.

Attorney at law

Correct Answer
C. Financial expert specifically trained in tax law

Explanation
A professional tax advisor is a financial expert who has received specialized training in tax law. They have in-depth knowledge and understanding of the complex tax regulations and laws, enabling them to provide expert advice and guidance to individuals and businesses regarding their tax obligations. Unlike a person trained to prepare tax returns, a tax advisor goes beyond just filling out forms and instead focuses on providing comprehensive tax planning strategies and solutions. While a Certified Management Accountant and an attorney at law may have knowledge in tax-related matters, a tax advisor specifically specializes in tax law.

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5.

Investing in a 401(k) has a direct impact in which of the following areas? (check all that apply)

A.

Amount of income taxes payable
B.

Amount of disposable income available
C.

Retirement earnings
D.

Vacation fund

Correct Answer(s)
A. Amount of income taxes payable
B. Amount of disposable income available
C. Retirement earnings

Explanation
Investing in a 401(k) has a direct impact on the amount of income taxes payable because contributions to a 401(k) are typically tax-deductible, reducing taxable income and therefore reducing the amount of taxes owed. It also affects the amount of disposable income available because contributions to a 401(k) are made pre-tax, meaning that the money is taken out of the paycheck before taxes are calculated, leaving the individual with less taxable income and more disposable income. Lastly, investing in a 401(k) directly impacts retirement earnings because the contributions made to the account grow over time through investment returns, allowing individuals to accumulate a larger retirement nest egg. The vacation fund is not directly affected by investing in a 401(k).

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6.

Which of the following is a tax scam recognized by the IRS?

A.

Frivolous Arguments
B.

Nigerian or 419 scams
C.

Spanish prisoner scams
D.

Scholarship scams

Correct Answer
A. Frivolous Arguments

Explanation
Frivolous Arguments is recognized as a tax scam by the IRS. This refers to unsupported and outlandish claims made by individuals to avoid paying taxes. These arguments are often based on misinterpretations of tax laws or conspiracy theories. The IRS warns taxpayers against falling for these scams and taking part in any illegal activities related to tax evasion.

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7.

What is the number one error on income tax returns?

A.

Overclaiming deductions
B.

Overclaiming exemptions
C.

Underreporting income
D.

Addition errors

Correct Answer
D. Addition errors

Explanation
Addition errors refer to mistakes made when adding up numbers on an income tax return. These errors can occur when calculating total income, deductions, exemptions, or any other financial figures. Addition errors can result in incorrect calculations, leading to inaccurate tax liabilities or refunds. It is crucial to double-check all calculations and ensure the accuracy of the numbers entered on the tax return to avoid potential penalties or audits.

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8.

The following choices are all methods of converting a traditional IRA to a Roth IRA. Which of these methods are taxable? (check all that apply)

A.

Rollover
B.

Cash out and reinvest
C.

Trustee-to-trustee transfer
D.

Transfer fund through a company bank

Correct Answer(s)
A. Rollover
B. Cash out and reinvest
C. Trustee-to-trustee transfer
D. Transfer fund through a company bank

Explanation
All of the methods listed - Rollover, Cash out and reinvest, Trustee-to-trustee transfer, and Transfer fund through a company bank - are taxable when converting a traditional IRA to a Roth IRA.

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9.

Which of the following tax strategies can be used to increase take-home pay? (check all that apply)

A.

Enroll in employer’s 401(k) plan
B.

Reduce the number of exemptions taken
C.

Increase the number of exemptions taken
D.

Deposit funds into an IRA account

Correct Answer(s)
A. Enroll in employer’s 401(k) plan
C. Increase the number of exemptions taken

Explanation
Enrolling in an employer's 401(k) plan can increase take-home pay because contributions to the plan are made on a pre-tax basis, reducing taxable income and therefore increasing the amount of pay received. Increasing the number of exemptions taken can also increase take-home pay as it reduces the amount of income subject to withholding taxes.

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10.

Who is required to sign on a married, filing jointly tax return prepared by a CPA?

A.

Husband
B.

Wife
C.

Husband, wife, and CPA
D.

Husband and wife

Correct Answer
C. Husband, wife, and CPA

Explanation
A married, filing jointly tax return prepared by a CPA requires the signatures of both the husband and wife, as well as the CPA. This is because the CPA is responsible for preparing the return accurately and ensuring compliance with tax laws. The signatures of both spouses confirm their agreement with the information provided in the return and their joint responsibility for its accuracy. The CPA's signature indicates their professional involvement and attests to the preparation of the return.

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Cwmc Module 28: Taxes Competency Test

Which of the following are strategies to help minimize taxes? (check all that apply)

Which of the following can reduce the AGI on an income tax return? (check all that apply)

Which of the following can directly reduce gross taxes on an income tax return? (check all that apply)

Which of the following best describes a professional tax advisor?

Investing in a 401(k) has a direct impact in which of the following areas? (check all that apply)

Which of the following is a tax scam recognized by the IRS?

What is the number one error on income tax returns?

The following choices are all methods of converting a traditional IRA to a Roth IRA. Which of these methods are taxable? (check all that apply)

Which of the following tax strategies can be used to increase take-home pay? (check all that apply)

Who is required to sign on a married, filing jointly tax return prepared by a CPA?