How Do I Know If I Have Tax Liabilities?
Understand the link between your financial activities and a tax liability. Our guide offers a clear path to determine your tax standing and what you might owe.
A tax liability is the total tax amount an individual or entity is legally obligated to pay to a taxing authority like the Internal Revenue Service (IRS). This obligation arises when your income or certain financial activities meet specific government-defined thresholds. This guide explains the factors that create a tax liability and how to determine if you owe taxes.
Determining Your Filing Requirement
A direct way to discover a potential tax liability is by determining if you are required to file a federal tax return. The IRS establishes gross income thresholds that mandate filing. If your income exceeds the amount set for your filing status and age, you must file a return, which will calculate any tax you owe. Gross income includes all income you receive as money, goods, property, and services that are not tax-exempt, such as wages, dividends, and capital gains.
For the 2024 tax year, you must file a tax return if your gross income meets or exceeds these amounts:
- Single (under age 65): $14,600
- Single (age 65 or older): $16,550
- Married filing jointly (both spouses under 65): $29,200
- Married filing jointly (one spouse 65 or older): $30,750
- Married filing jointly (both spouses 65 or older): $32,300
- Head of household (under age 65): $21,900
- Head of household (age 65 or older): $23,850
- Married filing separately (any age): $5
Even if your income is below these levels, you may still want to file a return. Filing is necessary to receive a refund for any income tax withheld from your pay or to claim refundable tax credits.
Common Situations That Create Tax Liabilities
Specific financial activities and types of income can generate a tax liability, even if your overall income is relatively low. For most people, employment income is the primary source of a tax liability. Your employer withholds federal income tax from your paycheck based on the information you provide on your Form W-4.
If you earn $400 or more in net earnings from freelancing, gig work, or operating a small business, you must pay self-employment taxes. This tax covers both the employee and employer portions of Social Security and Medicare taxes. It is due regardless of whether you owe any federal income tax and is calculated on Schedule SE, Self-Employment Tax.
Investment activities are another source of tax liabilities. When you sell an asset like a stock or real estate for a profit, you generate a capital gain. Gains on assets held for one year or less are short-term and taxed at your ordinary income tax rates, while gains on assets held for more than a year are long-term and taxed at lower rates. Income from dividends and interest also adds to your taxable income.
Distributions from retirement accounts often trigger a tax liability. Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income in the year you receive the money because contributions were made with pre-tax dollars. Other events, such as receiving rental income from a property you own or winning prizes, also create taxable income.
Calculating Your Estimated Tax Liability
You can perform a simplified calculation to get a sense of what you might owe. The basic formula starts with your gross income and subtracts any eligible deductions, like the standard deduction, to arrive at your taxable income. This taxable income is then multiplied by the applicable tax rates to determine your initial tax amount.
From this initial tax figure, you subtract any tax credits you qualify for and any tax payments you have already made. These payments include federal income tax withheld from your paychecks or any estimated tax payments sent to the IRS. The final result shows whether you have a remaining tax liability or are due a refund.
A reliable method for projecting your tax liability is to use the official IRS Tax Withholding Estimator tool. This online tool uses your specific financial information to provide a precise estimate of your expected tax obligation. If the tool indicates you are on track to owe money, you can take proactive steps to cover the shortfall. This might involve submitting a new Form W-4 to your employer to have more withheld from each paycheck or making quarterly estimated payments using Form 1040-ES.
How to Check for an Existing Tax Liability with the IRS
If you believe you might have an outstanding tax liability from a current or previous year, you can verify this directly with the IRS. The most efficient way to check your status is by using the IRS Online Account system, which provides secure access to your personal tax information.
To begin, you must create an account on the IRS website. The IRS uses a third-party service called ID.me to verify your identity and protect your data. This one-time setup process requires information like your Social Security number and a government-issued photo ID for verification.
Once your identity is verified and you are logged into your IRS Online Account, you can access your tax records. The account home page provides a summary of any amount you owe, your payment history, and other data from your returns. To investigate a specific year, navigate to the “Tax Records” section for more detailed documents.
Within the tax records, select the “Account Transcript” for the tax year in question. This document provides a chronological list of all activity on your account for that year, including the original tax assessed, any payments made, and any penalties or interest that have accrued. The “account balance” line item will show the total amount currently due for that year, providing a clear answer to whether you have an existing liability.