What is tax liability? It's how much you owe in taxes depending on your filing status and income
- Tax liability is the amount of taxes you owe to the IRS or your state government.
- Your income tax liability is determined by your earnings and filing status.
- Certain deductions and credits can help reduce your tax liability.
- If there's a difference between your tax liability and what you paid through employer withholdings or estimated payments during the year, it's due by April 15.
- This post has been been reviewed for accuracy by Thomas C. Corley, CPA.
- See Business Insider's picks for the best tax software »
Most Americans who earn an income are responsible for giving a cut to the government.
How much you owe to the IRS depends on your filing status and earnings and is known as your tax liability.
What is tax liability?
America has a progressive tax system with seven income tax rates ranging from 10% to 37%.
Each filing status has its own tax brackets (although married filing jointly and qualifying widow(er) use the same tax table); these represent the rates at which the individual or couple's income is taxed as they reach certain thresholds. The tax calculated is your tax liability, but not necessarily the tax due.
Below are the tax brackets for single filers and married filers that applied to income earned in 2019. They're adjusted each year for inflation.
Shayanne Gal/Business Insider
If you add up every dollar you earned in 2019 - or simply took your annual salary figure - and applied it to the tax brackets above, you will likely get a higher number than what you're actually responsible for paying. That's because certain deductions will lower the amount of your income that's taxed to begin with.
Further, if you paid interest on student loans or are self-employed and paid health insurance premiums throughout the year, for example, you can subtract those amounts from your gross income. These are referred to as adjustments to income, or above-the-line deductions. This results in your adjusted gross income (AGI).
From there, you can subtract either the standard deduction - $12,200 for single filers and $24,400 for married joint filers in 2019 - or itemized deductions (like mortgage interest or state and local taxes), whichever is higher. This brings you to your total taxable income. That's the figure the IRS applies to the tax brackets above to determine your true tax liability.
Is tax liability the same as tax due?
When you start a new job, you're required to fill out Form W-4. This tells your employer how much to withhold from your paychecks for income taxes based on your filing status, family situation, and any additional jobs you have.
Your employer sends the amount withheld for income taxes from each paycheck to the IRS on your behalf. At the beginning of the next calendar year, you'll receive a W-2 - or 1099 if you're an independent contractor - from each employer you had, detailing how much you earned and how much was withheld for taxes. Self-employed taxpayers generally pay their taxes quarterly rather than through withholdings.
In preparing your tax return, you'll compare the taxes you already paid for that tax year to your total tax liability. If it turns out you overpaid, you'll likely get a refund. If the opposite is true - your tax liability is more than the amount withheld - you'll probably have a tax bill.
If there are changes to your financial situation during the year, you're responsible for updating and resubmitting your W-4 to your employer to make sure the correct amount of money is withheld to cover your tax liability.
If you qualify for tax credits, you can apply them to your tax bill to lower the amount due on a dollar-for-dollar basis. Some credits are even refundable, meaning that if their total value wipes out your tax bill completely, you can get the remaining money back as a refund.
How do you estimate tax liability?
You can estimate your tax liability for the year by adding up all your income and subtracting any applicable deductions, and then applying that figure to the tax brackets for your filing status. If the math feels confusing, try an online calculator.
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