What is a tax liability?

This notorious term is one that comes around a lot this time of year. Many people don’t understand exactly what it means. Others have a general notion, but don’t understand how it comes about, or how it can be managed.

In this article, we will explain what a tax liability is, how people incur them, and what you can do if you face one yourself. We will simplify what is often a complicated process so that you find it easier to manage.

What is a tax liability?

Liabilities are things that you owe. Tax liabilities are money that you owe to different levels of government. More often than not, tax liabilities refer to federal government liabilities. 

If you have a total liability, this refers to liabilities that might come about from all the things you pay taxes on: income, capital gains, etc. It might also include taxes from previous years that have gone unpaid.

How to figure out your tax liability

Before figuring out your tax liability, you should look at the taxes that you have actually paid. You can see the amount that is automatically withheld from your paycheck in a separate section on any given check. 

When you prepare your tax return during any given season, you will be able to determine your total tax liability according to the 1040 instructions. If your withholdings are of a higher amount than your total tax liability, you should be able to get a refund from the government.

And this is why knowing your tax liability is important. If you adjust your tax withholdings to match your total tax liability, you can get your refund as close to zero as possible. Changing your withholdings could feel like getting a raise!

If you had to pay the IRS at the end of the year or got a big refund, talk to your employer about adjusting your W-4. You want to make sure you have just enough taxes taken out of your paycheck to keep Uncle Sam happy.

Things to keep in mind

There are some nuances to this rule for certain categories of people. If you are self-employed, for example, you will have to estimate your own tax liability. The same is true for owners of small businesses. In these cases, you will be expected to make quarterly tax payments throughout the duration of any given year.

How tax liability can come about

Tax liability comes about when there are occasions in which you make money, either through making a sale or earning income. In these cases, you will be put into one or another bracket of tax liability, depending on the amount that you sold or earned.

These brackets are a result of different factors, including whether you are:

  • A single filer
  • Married and filing jointly with your spouse
  • Married and filing separately from your spouse
  • Head of your own household

So, before you determine any given tax liability, you will need to figure out which category you fall into – just as you would on a W-4 – and then you can look on the IRS website to determine the amount. The amount is a percentage of your earnings that is adjusted to the category that you fit in.

Extra earnings are separate

One thing that you should keep in mind is that these calculations you make for extra earnings are separate from your total tax liability. In other words, the numbers that go into the calculation of your liability for any given extra income, asset sale, etc are strictly their own. The amount that you earn and your tax liability from your primary job are their own calculations.

Percentages change as you earn

Another thing to remember is that the more money you make, the greater a percentage you will owe. So you should always be careful to look in the chart not only according to your filing status, but according to the precise amount that you make from any given activity. 

Additional factors that could affect your tax liability

One of the reasons that calculating taxes accurately is because there are yet other factors that can also affect your liability. These can include the following:

  • Tax credits – Tax credits are different amounts of money that are credited back to you that can offset your tax liability. It could be a credit that is given to you in acknowledgment of taxes that you have already paid.
  • Exemptions – there are a wide range of exemptions that you might be able to claim on your taxes. Having children can provide you with an exemption, for example. Or you might be able to declare yourself, and your spouse. 
  • Deductions – There are many different types of deductions that you can claim on your taxes. They can include things like the following:
    • Money you give to charity, 
    • Interest that you pay on your mortgage
    • Education expenses
    • Medical expenses

In short, there are a wide range of things that can affect your final numbers. So you should be sure to read the instructions very carefully, and reach out to a tax specialist if you need additional help.

Ways to reduce your liability

When you fill out your taxes, be sure to think carefully about any deductions or credit that you might be eligible for. There might be deductions that you hadn’t thought of, and which could actually lower your overall tax bracket and change your entire situation.

Keep in mind that you have options for which type of deduction to take – either standard or itemized. Standard deductions are calculated depending on whether you are married or single. If your itemized deductions are less than your standard deduction, taking the standard deduction is preferable. 

As the name suggests, itemized deductions are ones that you count individually. What you need to do is figure out which final number would be most advantageous for you in terms of reducing your tax liability and increasing your chance of getting a refund.


Doing your taxes is never easy. Your goal should be to minimize the amount of tax liability that you have and increase your chances of getting a refund instead. While the process of figuring this out can be complicated, if you go about it systematically throughout the course of the year, you will maximize your possibility of getting a refund. Keep in mind that you should always be on the lookout for potential deductions so that you can reduce the overall income that you get taxed from. The lower your income, the lower your liability.

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