What Is Tax Liability? How to Determine What You Owe the IRS
The Total Amount You Owe to the IRS
Having “liability” means that you’re responsible for something. Combine that with the word “tax” and you see where this is going. A tax liability is a tax debt you’re responsible for paying to any taxing authority, but commonly the Internal Revenue Service.
It's composed of several interlocking parts, but the Internal Revenue Code gives you numerous options for managing it.
How to Find Your Tax Liability
This might be just one component, 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, such as if you entered into an installment agreement to pay off last year’s tax debt and you haven’t made the last payment on that agreement yet.
Your tax liability is everything you owe the IRS at any given point in time.
Line 15 vs. Line 22 of the 1040
Two lines on the 2018 Form 1040 actually refer to your tax liability. Line 15 tells you the total tax you owe for the year, then line 22 tells you how much of that amount is still outstanding.
Payments you've already made appear during the year on line 18. The difference between this and line 15 will either appear on line 19 as an overpayment or on line 22 as the balance you still owe.
Technically, line 15 is your total liability for the year, but the IRS presumably already has some of that money. It's line 22 that you have to concern yourself with because the IRS still wants that balance.
Line 18—Your Total Payments
Your employer deducted a percentage from your pay all year for taxes according to the information you submitted to on your Form W-4, and he obligingly sent this money to the IRS on your behalf. That total contributes to line 18.
Estimated tax payments you might have made during the year because you’re self-employed or you enjoyed some source of unexpected income are entered on Schedule 5, which goes with the new 2018 Form 1040. The total of Schedule 5 is transferred to line 17 of the 1040 and included in the amount on line 18 as well.
All these payments are subtracted from the number that appears on line 22. If this results in a negative balance—maybe your tax liability was $5,000 but your total payments including refundable credits added up to $7,500—you can expect a refund from the IRS for the difference.
And if you don’t have a negative balance? 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. This isn’t your total tax liability—that remains at $5,000, but you've paid some of that. It’s the amount of tax you still owe.
It’s Not Just Income Tax
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 the tax bracket they fall into—the percentage of their income that they must pay in taxes. This varies a fair bit because it depends on both filing status and how much you earn.
Maybe you’re single and you earn 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 you and your spouse jointly earn $200,000 a year? This puts you in a 24% tax bracket as well for the portion of your income that exceeds $168,400.
The income parameters for each tax bracket tend to increase annually to keep up 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—what you paid for it plus certain allowable expenses.
If you invest $5,000 in some stocks and turn around 18 months later and sell those same stocks for $7,500, you have a $2,500 long-term gain and this is taxed at special capital gains rates: zero percent, 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 it's 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) kindly 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 will hit some taxpayers hard. You could deduct a $4,050 exemption for yourself, one for your spouse if you're married, and one each of your dependents in the 2017 tax year. Even with just one exemption for yourself because you're single, it would drop your taxable income from $80,000 to $75,950.
Unfortunately, that exemption went away under the terms of the TCJA, at least from 2018 until 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 $12,000 in 2018, then to $12,200 in 2019. It, too, is indexed for inflation.
Remember that hypothetical $9,500 you're earning as a single taxpayer in 2019? Subtracting the $12,200 standard deduction from that amount leaves a negative balance so you would have no tax liability.
Your tax liability is not based on the total you earn in a given year. It’s based on what you earn less the standard deduction for your filing status or your itemized deductions if you decide to itemize instead. It’s based on what’s left after subtracting these figures, as well as any other deductions or tax credits you might be eligible for...and there are a few of those, too.
Adjustments to Income
You get to make certain adjustments to your total income on Schedule 1, "Additional Income and Adjustments to Income," which most taxpayers must file with their tax return in years 2018 and later.
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. Deductions subtract from your income so you're taxed on less, while credits subtract directly from what you owe the IRS.
Let's say you've done all the math and completed your return, and you’ve claimed every deduction available to you. You still show a $5,000 tax liability on line 15. 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 if 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 they reduce your liability to zero. If you have only a $500 tax liability on line 15 and you're eligible to claim that $1,000 refundable credit, the IRS will pay you instead and send you the $500 difference.
Paying Your Tax Liability
The bottom line is that you want to get rid of that balance on line 22 as expeditiously as possible. Otherwise, you'll accrue interest and penalties on the amount until it's finally paid off.
The IRS offers two online payment options, DirectPay and the Electronic Federal Tax Payment System (EFTPS). You can also pay by credit card.
And if you absolutely don't have the funds to get rid of your liability right away, the IRS offers installment agreements so you can pay over time. Yes, interest will accrue, and there's a small fee. But this is infinitely better than ignoring your liability and hoping it will just go away, because it won't.