What is a Tax Liability?
A tax liability is money that is owed for some type of tax. The term is typically used to refer to income or business taxes owed to a national, regional, or local tax authority. For example, if a person owes $1,500 US Dollars (USD) at the end of a tax year, that is his tax liability. Sometimes, however, a person also has tax liability because of the sale of property or even because he receives an inheritance. In most jurisdictions, a person or business calculates tax liability by using tax tables and formulas provided by a tax authority, and deductions and credits can be used to reduce the amount owed.
In most jurisdictions, people who earn above a very low threshold of income owe taxes to at least one tax authority. For example, many people pay taxes each year to a national government. Often, the taxes are a percentage of the amount of income a person has in a given year, which means liability varies from person to person. Likewise, deductions for certain expenses and the care of dependents may also affect a person’s tax liability.
Businesses can have tax liability as well. Depending, for example, on the way a business is structured, it may be subject to personal taxes on income, such as in the case of a sole proprietorship, or corporate taxes if it is a corporation. The various types of taxation a business may be subject to and the amounts it will have to pay may depend not only on its structure, but also on the jurisdiction in which it is located and the types of services or goods it sells. As with individuals, however, there are usually deductions and credits a business can take to reduce the tax it owes.
Sometimes people have tax liability that is related to income from work or the operation of a business. For example, if a person sells property, such as a home, car, or even an investment, he may be liable for taxes on the sale. Likewise, a person who receives money in the form of an inheritance may be liable for taxes as well. In some places, even such things as lottery winnings are subject to taxation.
In some cases, a person or business would normally have tax liability but has so many deductions and credits that he doesn’t have to pay any taxes in a given tax year. For example, a person may owe $2,000 USD in a particular tax year. If his allowed deductions and credits equal $2,000 USD, however, he will usually not owe taxes. Sometimes the deductions and credits are more than the taxes due. In some cases, this may translate into a refund of money, even if the person did not pay taxes in that year.
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