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Tax Liability
Definition
The total amount of tax you owe to the government after all deductions and credits.
Explanation
Your tax liability is calculated by: applying tax rates to taxable income, then subtracting tax credits. If withholding exceeds liability, you get a refund. If liability exceeds withholding, you owe the difference at tax time.
Underpayment penalties apply if you owe more than $1,000 at tax time and didn't pay enough through withholding or estimated payments throughout the year.
Example
Taxable income of $40,000 results in ~$4,600 tax liability. If $5,000 was withheld from paychecks, you receive a $400 refund.