What is Federal Tax Liability?

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Tax liability is the money from your income that is owed to the government.
Tax liability is the money from your income that is owed to the government. (Image: tax forms image by Chad McDermott from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Federal tax liability is the amount of money that is owed to the federal government on the income generated by individuals and companies. The Internal Revenue Service oversees the enforcement of tax laws and the collection of those taxes.

Tax Liability

Your tax liability is the difference between the amount of money you paid in federal tax and the amount of money you owe based upon IRS tax tables.

Witholding Taxes

Federal taxes are withheld from the income you generate from working and sent to the IRS to be used toward your tax liability. Federal taxes are also withheld from other forms of income including: pensions, bonuses, gambling winnings and commissions.

Estimated Tax

Estimated tax is normally paid by self-employed individuals or individuals who receive income from annuities, rents, royalties, capital gains and interest. The individual business owners are responsible for sending money to the IRS to be used toward their tax liabilities.

Adjusting your liability

If you find that you usually owe the federal government at the end of the year, you can change the number of exemptions you claim on your W-4 form. The fewer exemptions you claim the more money your employer will withhold and send to the IRS to use toward your tax liability.

Ways to lower your liability

You can lesson your tax liability by increasing the amount of deductions that you are entitled to take. IRA contributions are deductible as are charitable donations and medical payments if you itemize on your taxes.

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