What does Tax Liability mean?
Tax liability refers to the total tax than an individual or a business owes based on governing tax laws. Tax liability is generally driven by an event, such as the purchase of goods (i.e., sales tax), the owning of property (i.e., property tax), the receipt of income by earning a salary or selling an asset for a gain (i.e., income tax), or the inheritance of assets (i.e., estate tax).
Tax liability is determined by applying the applicable tax rates as defined by local, state, or federal taxing authorities. In the case of income tax, tax liability is determined based on the amount of income a person earns, the filing status the person uses, and any deductions, exemptions, or credits the person can claim. Given all of these factors, two individuals earning the same income can have widely-varying tax liabilities depending on how they invest, donate, or otherwise use their money.