How to Know if You Have Any Tax Liability
9 Min Read | February 17, 2022
Hey, nosotros're not going to geek out on accounting terminology, merely to empathise revenue enhancement liability, it's helpful to be familiar with two basic accounting terms: assets and liabilities. Assets are things you ain—remember money, property, your collection of obsolete prison cell phones. Liabilities are money you owe to other people. In other words: Bills yous need to pay.
So what is a tax liability?
A revenue enhancement liability is a taxation bill you lot owe to a country, local or federal government entity. But unremarkably when people talk about tax liability, they're referring to the big one: federal taxes.
What Is a Total Tax Liability?
Your total tax liability is the combined amount of taxes yous owe the IRS from income tax, upper-case letter gains tax, self-employment tax, and any penalties or involvement. This likewise includes any by-due taxes that yous oasis't paid from previous years.
Why It's Important to Know Your Taxation Liability
Your first day of work at a new job is usually a blur of new names and faces, but at some point you probably filled out a W-four form. This form determines how much money your employer withholds from your paycheck to send to the IRS to cover your tax liability.
Taxes shouldn't be this complicated. Permit usa help.
If yous're wondering how much you pay in taxes, take a look at your pay stub. (It'south that sideslip of paper you toss in the trash before cashing your check . . . or that form you lot ignore in your online payroll system.) Seriously, though, information technology'south a good idea to expect at your pay stubs from time to time just to make certain your withholdings are okay.
When tax flavour hits, if your paycheck withholdings are less than your full tax liability, y'all'll have to cut Uncle Sam a bank check for the difference. Boo! If your withholdings are higher than your total taxation liability, and then y'all'll go a refund. Yay! Well, don't exercise a tax refund happy trip the light fantastic simply nonetheless.
At the cease of the year, you actually don't want to pay extra taxes or become a big refund. A refund means you overpaid Uncle Sam for a whole twelvemonth. Wouldn't y'all rather keep that extra money in your pocket?
And this is why knowing your tax liability is important. If yous adjust your taxation withholdings to lucifer your total tax liability, you tin go your refund equally close to zero as possible. Irresolute your withholdings could feel similar getting a raise!
If you had to pay the IRS at the end of the year or got a big refund, talk to your employer about adjusting your Due west-4. You desire to make sure you have just enough taxes taken out of your paycheck to keep Uncle Sam happy.
If you're cocky-employed or own a small business organisation, things are a picayune more complicated. You'll have to guess your tax liability and make quarterly tax payments throughout the year. Just the goal is the same: Don't overpay or underpay the IRS.
Examples of Income Tax Liability
Whatever time there is a taxable upshot—recollect earning income or selling something—you rack upwards tax liabilities. Thealmost mutual type of tax liability isearned income. Your taxable income gets divided into income ranges—or brackets—with each range getting taxed at a certain rate.
Warning: These brackets aren't nearly as fun as March Madness brackets. Here are the federal income tax rates and brackets for the 2021 tax year.ane
| Tax Charge per unit | Single | Married, Filing Jointly | Caput of Household | Married, Filing Separately |
| 10% | $0–ix,950 | $0–19,900 | $0–14,200 | $0–nine,950 |
| 12% | $9,951–40,525 | $xix,901–81,050 | $14,201–54,200 | $9,951–xl,525 |
| 22% | $twoscore,526–86,375 | $81,051–172,750 | $54,201–86,350 | $xl,526–86,375 |
| 24% | $86,376–164,925 | $172,751–329,850 | $86,351–164,900 | $86,376–164,925 |
| 32% | $164,926–209,425 | $329,851–418,850 | $164,901–209,400 | $164,926–209,425 |
| 35% | $209,426–523,600 | $418,851–628,300 | $209,401–523,600 | $209,426–314,150 |
| 37% | Over $523,600 | Over $628,300 | Over $523,600 | Over $314,150 |
And so, allow's say you lot earn $60,000 in gross income in a year and you're a single filer. If y'all have the standard deduction of $12,550, that leaves you with $47,450 in taxable income—putting you in the 22% tax bracket. What? That's going to be similar x grand in taxes! Well, non quite.
The good news is that whatever bracket you find yourself in, you don't have to pay that percentage on your entire income—merely the portion that lands in that range. The residual of your income is taxed at the lower rates for each bracket that your income fills up.
So, your starting time $nine,950 is taxed at x% ($995 in taxes). The second portion of your taxable income—anything between $nine,951 and $twoscore,525—is taxed at 12% ($3,669 in taxes). Anything over $twoscore,525 is taxed at 22% ($ane,523.l in taxes). For a chiliad total of (drumroll please) $6,187.50!
Let's take a await at the math . . . or just skip to the next paragraph if math isn't your thing.
Total Taxes on $47,450 of Taxable Income
| Tax Bracket | Taxes Owed |
| 10% Tax Bracket: $0–9,950 $9,950 (.x) = $995 | $995 |
| 12% Tax Bracket: $ix,950–twoscore,525 $40,525 – $9,950 = $30,575 $30,575 (.12) = $3,669 | $iii,669 |
| 22% Tax Subclass: $40,525–86,375 $47,450 – $40,525 = $half dozen,925 $six,925 (.22) = $1,523.50 | $1,523.l |
| Total Taxes Due | $six,187.fifty |
This is a pretty basic example, and there are more than factors that can impact your total tax liability—like taxation credits, exemptions and deductions—and things can start to become hazy. If you experience the room starting to spin, just reach out to a tax pro. They tin can help clear up the confusion then you lot can experience confident that yous're covering all your bases (and paying your taxes on time).
How to Find Your Tax Liability on the 1040 Form
Over the last few years, the IRS has tried to make some changes to the 1040 grade in an effort to make it a little bit simpler to fill out. But it's notwithstanding a government form with a lot going on. All that said, here's where you can discover your revenue enhancement liability totals this twelvemonth.
Line 24 shows thetotal tax you owe for the current year after deductions and credits. Only don't worry—this is the amount you owebeforesubtracting what you've paid throughout the year from withholdings. Phew!
Line 25 is where you'll fill in how much you've already paid in taxes. You tin plug in the amounts withheld from W-2s, 1099s and whatever other forms that show y'all dished out dough to Uncle Sam.
You can list whatever other payments y'all made and additional credits you lot can claim on lines 26 through 31. Add together up lines 25, 26 and 32 to notice how much you've already paid in taxes and your additional credits—or your full payments. This total goes on line 33.
Now, if your total tax (line 24) minus your total payments (line 33) equals zilch, congratulations! You owe nothing and get nothing dorsum. Y'all covered your tax liability throughout the year. If line 33 (your payments and boosted credits) is higher than line 24 (full tax owed), you'll become a refund for the corporeality you overpaid.
On the other hand, if line 24 is higher than line 33, y'all'll fill up out line 37 with the deviation—the IRS made it easy for yous by calling this line amount you owe. (How thoughtful.) This is your remaining tax liability. And if that isn't bad plenty, if that number is above $1,000, y'all'll also have to pay a punishment on superlative of your revenue enhancement bill. No thank you.
How to Reduce Your Tax Liability
Hello, deductions and credits! Ane mode to reduce your tax liability is to accept advantage of whatever deductions and tax credits y'all're eligible for. These babies reduce your taxable income and can put you in a lower taxation bracket, meaning less of your income will be taxed.
When it comes to these deductions, you tin either take thestandard deduction—$12,550for unmarried filers and$25,100 for married couples for the 2021 tax year—or you can itemize your deductions.2 This includes certain medical expenses, mortgage interest or holding taxes, to name a few.
Keep in mind that if your itemized deductions are less than the standard deduction, your best route is to get ahead and take the standard deduction so less of your income gets taxed. After Congress virtually doubled the standard deduction in 2017, most taxpayers get more bang for their cadet by taking the standard deduction instead of itemizing.
Tax credits are some other mode of reducing your total tax liability. These are different from deductions because credits reduce the dollar amount of your total revenue enhancement beakafter the revenue enhancement percentages have been applied. These are things like the child or dependent taxation credits or the adoption credit.
If you've finished Baby Steps 1 through 3, you can likewise cutting down your tax liability by contributing to a 401(1000) or other pretax retirement savings account. This lowers your taxable income. Merely keep in mind this isn't the best option for everyone in the long run. That's because you'll have to pay taxes on your savings when you start taking out money at retirement historic period.
Only remember—this isnotan alibi to skip to this pace if y'all oasis't already paid off all your debt and saved upwardly a fully funded emergency fund. A few dollars saved on taxes isn't worth staying tied to all those monthly debt payments. Bottom line: Never invest in something but to get a revenue enhancement benefit. And talk to a SmartVestor Pro to see which option is right for you.
File Your Taxes With Confidence
While tax season may never be your favorite time of twelvemonth, you don't have to practise information technology all on your own. Achieve out to a RamseyTrusted Endorsed Local Provider (ELP) in your area to help you sort out your tax situation—tax liabilities and all! Get fix to walk into the side by side flavour feeling like a tax boss. Go a tax pro today!
Feel like your taxes are simple enough to do yourself with taxation software? Ramsey SmartTax makes it like shooting fish in a barrel to take control of your taxes and file your revenue enhancement return in a matter of minutes. You won't be surprised past hidden fees, and you won't have to make sense of confusing tax jargon—what y'all come across is what you get!
Larn more about Ramsey SmartTax today!
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Source: https://www.ramseysolutions.com/taxes/what-is-a-tax-liability
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