Any sum you owe a taxing body, like the Internal Revenue Service, is considered part of your tax liability.
Examples of Tax Liability and Their Definition
The sum of money you owe the U.S. government in a given year is your federal tax liability. It is based on the Internal Revenue Service’s regulations (IRS).
You can find your tax liability for the tax year you’re filing for by preparing and submitting your income tax return. You should add any outstanding balances from previous years to the amount you owe on that return. This determines your overall tax liability.
If you got into an installment agreement with the IRS to settle your tax debt from the previous year and haven’t yet made the final payment under that agreement, it’s included in your tax liability.
Lines 37 and 38 of the IRS Form 1040 for 2021 contain your yearly tax liability. Line 37 correctly states, “Amount you owe.” You can pay any additional fines you might owe for sending in your estimated tax payments after the deadline on line 38.
Your total tax obligation for the year is technically shown on line 24. However, it’s likely that the IRS already has some of that cash in its possession, either because of tax withholding from your paychecks or due to estimated quarterly payments you’ve made.
Because the IRS still requires that balance, line 37 is the one you need to pay attention to.
The amount of your tax liability can be calculated by subtracting the withholding from your paycheck and any estimated tax payments you made.
Line 33 shows the amounts you’ve already paid to the IRS. It will either show up on line 34 as an overpayment, indicating that you will be getting a refund or on line 37 as a balance you still owe.
The Process of Tax Liability
According to the data you provided on your Form W-4, your employer most likely deducted a portion of your pay each pay period for taxes. Your withholding was sent to the IRS by them on your behalf. You can see the amount on line 25a of your 2021 tax return.
If you are self-employed or get some unforeseen income during the year from which taxes weren’t withheld, you may have made estimated tax payments. Utilizing Form 1040-ES, Estimated Tax for Individuals, these payments are made. Your 2021 1040 tax return, which you’ll file in 2022, should have line 26 blank except for the amount you paid.
You calculate your tax liability by deducting all of these payments from the figure on line 24.
If the balance of your tax liability is less than the amount of taxes you have already paid, the IRS will issue you a refund.
If your tax liability were $5,000 and your total payments plus any refundable tax credits you were entitled to be $7,500, you would be given a refund of $2,500. Even though you only made a total of $4,000 in payments, you would still owe the IRS $1,000.
Aspects That Influence Your Tax Liability
For most people, income tax makes up most of their tax obligation. It is partly influenced by tax brackets, which represent the percentage of your income that must be paid in taxes for each portion. These percentages vary according to your filing status and income.
If you’re single and make just $10,200 in 2022, you’ll be in the 10% tax bracket, which means your tax obligation will be $1,020. If you were to make $95,000, you would be pushed into a 24 percent tax bracket on the portion of your income exceeding $89,075.
The total amount of money you make in a year does not determine your tax obligation. It is based on your income less the standard deduction applicable to your filing status, or, if you choose to itemize deductions, your itemized deductions. Additionally, it takes into account any additional tax breaks or credits for which you might be qualified.
Important: The Internal Revenue Code (IRC) enables you to reduce your taxable income so that your tax obligation is determined by your taxable income rather than your total earnings.
For single filers, the standard deduction has increased from $6,350 in 2017 to $12,950 in 2022. It, too, has an inflation index. Using the fictitious single taxpayer earnings of $10,275 for 2022, the $12,950 standard deduction would be subtracted, leaving a negative balance and no tax due.
Schedule 1, “Additional Income and Adjustments to Income,” allows you to make additional adjustments to your overall income. The standard deduction and any other allowable itemized deductions would be in addition to these. They consist of things like the student loan interest deduction, the educator’s expenses, and a portion of the self-employment tax you would owe if you worked for yourself.
Tax credits also lower your tax obligation, but they do so differently. Deductions help you pay less in taxes by lowering your income, whereas credits directly lower the amount of tax you owe the IRS. If you are qualified for a $1,000 tax credit, your obligation will decrease from $5,000 to $4,000, as if you had given the IRS a check for that sum.
If you are entitled to one, a refundable tax credit will have benefits beyond just reducing your tax obligation. If there is any balance after the credit reduces your tax liability to zero, the IRS will send you a refund. If your tax liability is only $500 and you are qualified to claim a $1,000 refundable credit, you will be directly given the $500 difference. However, most credits are not returnable.
Different Tax Liabilities
Tax liability extends beyond any income taxes you may owe. Technically, the phrase refers to all taxes, including self-employment tax and capital gains taxes, as well as interest and penalties. Additional influencing variables include:
Interest was added to your overall tax liability if you and the IRS entered into an installment agreement to pay taxes from a prior year.
The 10 percent penalty for premature withdrawal of funds from a retirement account
Capital gains tax is due when an asset is sold for more than its basis. The sum of your asset investment serves as your basis. Long-term gains are subject to special capital gains taxes at 0%, 15%, or 20%, depending on your income (with some rare exceptions). It was a short-term gain if you had the asset for one year or less. Your tax liability would be increased as a result, and it would be taxed in accordance with your tax bracket.
How much tax liability do I have?
The bottom line is that in order to avoid paying interest and penalties until the balance on line 37 of your tax return is paid off, you must pay it as soon as possible.
The IRS provides Direct Pay and the Electronic Federal Tax Payment System as online payment options (EFTPS). At some retail partners, you can pay with a debit or credit card, an e-wallet, a bank wire, a check or money order, or cash.
If you lack the money to pay your tax debt in full immediately, the IRS offers installment agreements that allow you to pay it off over time. A small fee and interest will be charged. But making payments gradually is far preferable to ignoring your debt and hoping it will disappear.
- When you have finished filling your tax return, your tax liability is the amount you owe to the IRS or another taxing body.
- Your taxable income determines your tax obligation following the deduction of certain expenses and the claim of certain tax credits, not your overall earnings.
- The amount of federal taxes you owe for the most recent tax year is shown on line 37 of the 2021 Form 1040, the return that you would submit in 2022.
- Any unpaid sums from prior years would also be included in your total liability.