Question

Using the facts from the previous problem, how would your answer change if Latoya understated her income by 40 percent? How would your answer change if Latoya intentionally failed to report as taxable income any cash payments she received from her clients.

Answer 1

Understating income by 40 percent or failing to report cash payments leads to paying less in taxes and potential legal consequences. Correct calculations of taxable income and knowledge of marginal tax rates are crucial for accurate tax reporting.

Step-by-step explanation:

When Latoya understates her income by 40 percent, this would result in Latoya paying less in taxes than she is obligated to because her reported taxable income would be reduced significantly.

If her correct income places her in a higher tax bracket with a higher marginal tax rate, understating income could also falsely position her in a lower tax bracket, leading to even less tax liability.

On the other hand, if Latoya intentionally fails to report cash payments as part of her taxable income, this could be considered tax evasion, as she is avoiding paying taxes on income earned. Both scenarios lead to incorrect tax calculations and potential legal consequences for tax evasion.

To calculate the adjusted gross income and taxable income is crucial for determining the accurate tax owed. The marginal tax rate increases as income rises, as described in the clear example provided where income up to $9,075 is taxed at 10%, and the next tier up to $36,900 is taxed at 15%.

If all income is reported accurately, Latoya's taxes could be determined using her gross income minus allowable deductions and exemptions to find her taxable income, followed by applying the corresponding tax rates to that amount.