Loading the player...

What is a 'Tax Liability'

A tax liability is the total amount of tax debt owed by an individual, corporation or other entity to a taxing authority like the Internal Revenue Service (IRS). It is the total amount of tax you're responsible for paying to the taxman. Tax liabilities are incurred due to earning income, a gain on the sale of an asset or other taxable events.

BREAKING DOWN 'Tax Liability'

A tax liability is the amount of taxation that a business or an individual incurs based on current tax laws. Taxes are imposed by a variety of taxing authorities, including federal, state and local governments. When a taxable event occurs, the taxpayer needs to know the tax base for the event and the rate of tax on the tax base.

The tax liability doesn't just include the current year, instead, it factors in any and all years that the entity may owe taxes. That means that if there are back taxes (any taxes that remain unpaid from previous years) due, those are added to the tax liability as well. 

Examples of Income Tax Liability

The most common type of tax liability for taxpayers is the tax on earned income. Assume, for example, that a taxpayer earns $50,000 in gross income, which is reported on an IRS W-2 form at the end of the year. If the federal tax rate is 20 percent, the tax base of $50,000 is multiplied by the 20 percent rate to compute a federal tax liability of $10,000.

Assume that the taxpayer’s W-4 resulted in the employer withholding $8,000 in federal taxes, and that the taxpayer made a $1,000 tax payment during the year. When the taxpayer files the Form 1040 individual tax return, the remaining tax payment due is the $10,000 tax liability less the $9,000 in withholdings and payments, or $1,000. On the other hand, if the taxpayer's W-4 information resulted in $5,000 in withholdings and no $1,000 tax payment is made during the year, the tax payment due with the tax return is the $10,000 liability less the $5,000 payment, or $5,000.

How Capital Gains Are Taxed

When a taxpayer sells an investment, real estate or another asset for a gain, that individual pays taxes on the gain. Assume, for example, that a taxpayer purchases 100 shares of XYZ common stock for $10,000 and sells the securities five years later for $18,000. The $8,000 gain is considered to be the tax base for this taxable event, and the transaction is a long-term capital gain, since the holding period is greater than one year. The tax rate for capital gains can be different from rates for income taxes and other tax calculations. If the tax rate is 10 percent, the tax liability is $800 and the taxpayer will include this calculation on the individual 1040 tax return.

Line 63 — Total Tax (Liability)

Filled out your Form 1040? Lines 52 through 62 added together will give you your total tax liability to the IRS — and that total will go into line 63. This appears on the last page of the Form 1040. Sometimes that sum might make your stomach turn because it can appear high. Not to fret. When the tax liability is calculated, you will then adjust the liability for estimated tax payments, tax credits and other items to compute the amount of taxes currently due and unpaid. If you overpaid, then you end up with a refund. On the other hand, if you paid too little, then you'll owe the IRS some more change. 

RELATED TERMS
  1. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  2. Income Tax Payable

    Income tax payable is an account in the balance sheet's current ...
  3. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  4. Tax Benefit

    A tax benefit is an allowable deduction on a tax return intended ...
  5. Tax Relief

    Tax relief is any program or incentive that reduces the amount ...
  6. Back Taxes

    Back taxes are taxes that have been partially or fully unpaid ...
Related Articles
  1. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  2. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  3. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  4. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  5. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  6. Taxes

    Does Online Tax Software Really Save You Money?

    Both online tax software and tax professionals have their own set of advantages, but which one is actually better for your bottom line?
  7. Taxes

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  8. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  9. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
RELATED FAQS
  1. Do tax liabilities appear in the financial statements?

    Find out how taxes are shown on the balance sheet, the income statement and the cash flow statement, and why taxes are an ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center