What Is Tax Liability?

How to Determine What You Owe the IRS

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Having “liability” means that you’re responsible for something. Your tax liability is the taxes you’re responsible for paying to a taxing authority, such as the Internal Revenue Service (IRS). There are several components to your total tax liability, including unpaid taxes from prior years.

How to Find Your Tax Liability

You can find your tax liability for the year on line 23 of the revised Form 1040. Appropriately, the line says, "Amount you owe.”

However, your total tax liability isn't necessarily for just one tax year. Anything that remains unpaid from previous years must be added to your liability for the current year. For example, if you entered an installment agreement to pay off last year’s tax debt and you haven’t made the last payment on that agreement yet, that's part of your current tax liability.

Your tax liability is everything you owe the IRS (or other tax authority) at any given time. 

Line 16 vs. Line 23 of Form 1040

Two lines on Form 1040 actually refer to your tax liability. Line 16 tells you the total tax you owe for the year, then line 23 tells you how much of that amount is still outstanding.

Payments you've already made appear on line 19. The difference between this and line 16 will either appear on line 20 as an overpayment (indicating a refund) or on line 23 as the balance you still owe.

Technically, line 16 is your total liability for the year, but the IRS presumably already has some of that money. It's line 23 that you have to concern yourself with because the IRS still wants that balance.

Line 19: Your Total Payments

Your employer likely deducted a percentage from your pay all year for taxes according to the information you submitted to on your Form W-4 and sent this money—your withholding—to the IRS on your behalf. It's shown on Line 17.

Estimated tax payments you might have made during the year because you’re self-employed or you enjoyed some source of unexpected income should be paid using Form 1040-ES, Estimated Tax for Individuals. The amount you paid should be shown on Schedule 3 and attached to your Form 1040 (or 1040-SR).

All these payments are subtracted from the number that appears on line 23.

If the difference between taxes paid and your total tax liability results in a negative balance, you can expect a refund from the IRS for the difference. 

Say your tax liability was $5,000 but your total payments including refundable credits added up to $7,500, you would receive a refund of $2,500.

On the other hand, if your liability was $5,000 but you only made $4,000 in total payments, including refundable credits, you still owe the IRS $1,000. 

It’s Not Just Income Tax

Tax liability isn’t just limited to any income tax you might owe. The term covers all forms of taxes, such as capital gains and self-employment tax, as well as interest and penalties.

That installment agreement you might have entered into for last year’s taxes is payable with interest, so the interest is added to your total tax liability. If you took an early distribution from a retirement account that was subject to the 10% penalty, that’s included in your total tax liability, too.

Income Tax Rates

Income tax is nonetheless the largest component of tax liability for most people, and it’s determined in part by tax brackets—the percentage of each portion of their income that they must pay in taxes. This varies a bit because it depends on both filing status and how much you earn.

Maybe you’re single and you earned just $9,500 in 2019. This puts you in the 10% tax bracket, so your income tax liability is $950.

If you earn $95,000, however, this pushes you up into a 24% tax bracket on the portion of your income that exceeds $84,200. And if you’re married and making the same amount (combined), you're instead taxed 22% on the amount over $78,951.

To be taxed in the highest bracket, 37%, you'd need to earn more than $510,300 as a single filer or $612,350 if married filing jointly.

The income parameters for each tax bracket are indexed annually to keep pace with inflation.

Capital Gains Taxes 

Capital gains tax can add to your tax liability if you sell an asset for more than your basis in it. Basis is the amount of your investment in the property or asset.

For example, if you invest $5,000 in some stocks and 18 months later sell those stocks for $7,500, you have a $2,500 long-term gain. Long-term gains are taxed at special capital gains rates: 0%, 15%, or 20% as of 2019 depending on your income. The more income you earn overall, including your regular income, the higher your capital gains tax rate.

If you owned the asset for less than a year, it's a short-term gain, so it's added to your tax liability as ordinary income and taxed according to your tax bracket.

The Power of Tax Deductions

These factors are just the beginning of your tax liability. The Internal Revenue Code (IRC) allows you to whittle away at your taxable income with various deductions.

The Tax Cuts and Jobs Act of 2018 took away the deduction for personal exemptions, which hit some taxpayers hard. You once could deduct a $4,050 exemption for yourself, one for your spouse if you're married, and one for each of your dependents in the 2017 tax year.

That exemption went away under the terms of the TCJA—at least from 2018 to 2025. But plenty of other deductions and tax credits remain intact.

The standard deduction has almost doubled. It increased for single filers from $6,350 in 2017 to $12,200 in 2019. It, too, is indexed for inflation.

Using the hypothetical $9,500 single taxpayer earnings for 2019 from our example above, subtracting the $12,200 standard deduction would leave a negative balance—and therefore no tax liability.

Your tax liability is not based on the total you earn in a given year. It's your earnings minus the standard deduction for your filing status (or your itemized deductions if you decide to itemize instead), as well as any other deductions or tax credits you might be eligible for.

Adjustments to Income

You'll make certain adjustments to your total income on Schedule 1, "Additional Income and Adjustments to Income."

Deductions you claim here are in addition to the standard deduction or itemized deductions. They include things like educator expenses, the student loan interest deduction, and a portion of any self-employment tax you might have to pay if you work for yourself.

Don’t Forget Tax Credits

Tax credits reduce your tax liability, too, but in a somewhat different way. While deductions subtract from your income so you're taxed on less, credits subtract directly from what you owe the IRS.

For example, let's say you've completed your return, and you’ve claimed every deduction available to you. You still show a $5,000 tax liability on line 16. If you’re eligible to claim a $1,000 refundable tax credit, that liability drops to $4,000 because these tax credits are treated as actual tax payments, just as though you had written the IRS a check for the amount.

Refundable tax credits don’t just subtract from your tax liability. The IRS will send you a refund for any balance that's left over if these credits reduce your liability to zero. If you have only a $500 tax liability on line 16 and you're eligible to claim a $1,000 refundable credit, the IRS will send you the $500 difference.

Paying Your Tax Liability

The bottom line is that you must pay the balance on line 23 as quickly as possible. Otherwise, you'll accrue interest and penalties on the amount until it's finally paid off.

The IRS offers online payment options via DirectPay or the Electronic Federal Tax Payment System (EFTPS). You can also pay by debit or credit card, electronic funds withdrawal, bank wire, check or money order, or even cash at certain retail partners.

And if you simply don't have the funds to get rid of your liability right away, the IRS offers installment agreements so you can pay over time. Interest will accrue, and there's a small fee. But it's much better to pay over time than ignore your debt and hope it goes away.

Article Sources

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  5. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed April 22, 2020.

  6. IRS. "2019 Instructions for Schedule D (Rev. January 2020) (2019)." Accessed April 22, 2020.

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  11. IRS. "Paying Your Taxes." Accessed April 22, 2020.