What Is a Tax Liability?

Your tax liability is any amount you owe to a tax authority such as the Internal Revenue Service. Taking responsibility means that you are responsible for something.

There may be several components to your total tax liability to an agency, including unpaid taxes from prior years.

Anything that was not paid in previous years should be added to what you owe in the current year to figure your total tax liability. It is included in your tax liability if you entered into an installment agreement with the IRS to pay off last year's tax debt and you have not yet made the final payment on that agreement.

What is tax liability?

You can find your tax liability for the year on lines 37 and 38 of the revised 2020 Form 1040. Appropriately, line 37 says "Amount you owe." Line 38 is dedicated to any penalties you may owe for late payment of your estimated taxes.

Actually, two lines on Form 1040 refer to your tax liability. Row 37 tells you the total amount of tax you owe for the year, then row 38 shows the estimated tax penalties you may be owning.

Technically, line 24 is your full responsibility for the tax year, but the IRS probably already has some of that money, either through withholding tax from your paychecks or because you made quarterly estimated payments. It's line 37 that you should be concerned about, because the IRS still wants that balance.

Payments you have already made to the IRS appear on line 33. The difference between this and line 24 will appear on line 34 as an overpayment, indicating that you will receive a refund, or on line 37 as a balance that is still owes.

How does a tax liability work?

Your employer likely deducted a percentage of your tax payment for the entire year based on the information he submitted to the business on Form W-4.

They sent this money, your withholding, to the IRS on your behalf. This appears on line 25a of your 2020 income tax return.

You may have made estimated tax payments during the year if you are self-employed or because you enjoyed some unexpected source of income from which no taxes were withheld.

These payments are made using Form 1040-ES, estimated tax for individuals. The amount you paid should be entered on line 26 of your 1040 income tax return.

All of these payments are subtracted from the number on line 24 to figure your tax liability.

You can expect a refund from the IRS if the difference between your taxes paid and your total tax liability results in a negative balance.

You would receive a refund of $ 2,500 if your tax liability was $ 5,000, but your total payments, including refundable tax credits for which you qualified, amounted to $ 7,500.

But you still owe the IRS $ 1,000 if your liability is $ 5,000 and you only make $ 4,000 in total payments, including refundable claims.

Factors that affect your tax liability

Income tax is the largest component of tax liability for most people and is determined in part by tax brackets - the percentage of each part of your income that you must pay in taxes. These percentages vary based on the status of your order and how much you earn.

You would be in the 10% tax bracket and your income tax liability would be $ 950 if you were single and made only $ 9,500 in 2020. But you would be pushed into a 24% tax bracket on a portion of your income that exceeds $ 85,525 if you win $ 95,000.

The income parameters for each tax band are indexed to track inflation. They are adjusted annually, usually increasing slightly.

Your tax liability is not based on the total money you earn in a given year. It is based on your earnings minus the standard deduction for your filing status or your itemized deductions if you choose to itemize instead. It is also based on other tax deductions or credits for which you may be eligible.

Types of tax obligations

The tax liability is not just limited to the income tax you may owe. Technically, the term covers all forms of taxes, such as tax on capital gains and self-employment, as well as interest and penalties. Tax obligations may also include the following:

Interest is added to your total tax liability if you entered into an installment agreement with the IRS to pay taxes for the previous year.

An early distribution from a retirement account that was subject to the 10% penalty would also be included in your total tax liability.

Capital gains tax can increase your tax liability if you sell an asset for more than its basis. Your basis is the value of your investment in the property or asset. Long-term gains are taxed at special capital gains rates: 0%, 15%, or 20% starting in 2020, depending on your income.

It is a short-term gain if you owned the asset for a year or less, and this would be added to your tax liability as normal income and taxed according to your tax bracket.

Do I need to pay a tax debt?

The bottom line is that you must pay the balance on line 37 of your income tax return as soon as possible to avoid paying interest and penalties on the amount until it is paid.

The IRS offers online payment options through direct payment or the Electronic Federal Tax Payment System (EFTPS). You can also pay by debit or credit card, electronic fund withdrawal, bank transfer, check or money order, or even cash at select retail partners.

And the IRS offers installment agreements so you can pay over time if you just don't have the funds to get rid of your liability right away.

Interest will accrue and there will be a modest fee, but it's far better to pay it off over time than to ignore your debt and wait for it to go away.

We hope you enjoy watching this video about What Is a Tax Liability?

Source: Rene Angel Ramirez

 

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