An individual or entity’s tax liability represents the total amount of taxes owed to federal, state and local governments as determined by law after accounting for all pertinent credits, deductions and exemptions applicable to the tax year’s taxable income and transactions.
Components of Liability:
- Personal income taxes on wages, business profits, capital gains, and other sources of earnings
- Corporate income and franchise taxes calculated as a percentage of taxable net profits
- Payroll taxes split between employers and employees to fund social welfare programs
Example:
A married couple meticulously prepared their joint tax return to accurately compute taxes due or refund after accounting
for all items raising or lowering their total tax liability.
Takeaways:
Tax planning leverages valid strategies within compliance to legally minimize liability and allow retaining more net pay or profits. However, evasion or aggressiveness carries strict penalties for underpaying one’s rightful share of supporting public services.