What is a tax liability?

Your federal tax liability is the total amount of tax you owe to the IRS, state or local government for the year. A tax liability includes your income tax ― including tax on capital gains ― self-employment tax and any other federal taxes.

A tax liability is not the same as the amount you owe when you file your return. For example, if you paid $5,000 in estimated taxes to the IRS for the year and your tax due for the year when you file is $6,000, you owe the IRS $1,000 ($6,000 – $1,000). Your tax liability, or the amount you pay the IRS for the year, is still $6,000, regardless of how much you pay when you file or even if you get a refund.

Tax debt from previous years includes any unpaid tax liability from each year, plus penalties and interest that have accrued since those taxes should have been paid.

How can I reduce my tax liability?

The most straightforward way to reduce your tax liability is to reduce your amount of income subject to tax. From timing business expenses to making careful investments, business owners can use a variety of strategies to lower their liability.

1. Know which deductions you can take legally.

“Many small business owners are unaware of deductions and are missing out on money that can be saved every year,” said Gary Milkwick, chief financial officer of 1-800Accountant.

Milkwick cited the following common business deductions as opportunities to…[MORE]