Matters of income and tax can be hard for many people to grasp. Sure, you know that you need to pay taxes on your income—that money is usually taken right out of your check. And, of course, you need to file your tax return each year to see if you’re owed anything by Uncle Sam. But outside of these things, the water becomes murky.
The concept of tax liability is something that escapes many people completely, even though they’re actually very familiar with it. You deal with it every time you get a paycheck and each year when you sit down for tax preparation in Jamestown, ND. Simply put, tax liability refers to the amount of money you owe the government during a taxable situation. Here are a couple of examples:
- You earn money at your job that’s reported on a W2 each year. For each dollar you earn, a percentage of that is taxed. That’s your tax liability.
- You buy stock and watch it grow before cashing out with a nice profit 10 or 15 years later. As that money grows each year, you’ll need to pay taxes on that growth. This is the tax liability of those stock holdings. And, when you withdraw and pay capital gains taxes, that’s another form of tax liability.
- If your parents decide to gift you a large sum of money, you’re likely going to owe taxes on that gift. The tax is, once again, its tax liability.
Tax liabilities show up in virtually any place where there’s an exchange of goods or services, or a person receives monetary income. From working multiple jobs, to selling your car on Craigslist, to accepting lottery winnings from a casino, all of these things incur tax, and therefore have a tax liability.
Now, while tax liability is a simple enough concept to understand, figuring out the dollar amount of a liability is very tricky. It depends on a great number of factors, including:
- If the event is taxable, and at what rate
- How the event is taxed
- What the value of the income is
- What exemptions exist
Most often, tax liabilities are figured into your annual tax returns. This is often why someone assisting with tax preparation in Jamestown, ND will want to see your receipts or other investment statements. They’ll need to determine what situations over the years have resulted in tax liabilities and how to determine exactly what you’re liable to pay for each of them.
Think that’s complicated? Imagine being a company that does hundreds or even thousands of transactions each day! There’s a tax liability associated with every good sold, employee hired or investment made. That’s a lot to account for! It’s why companies big and small have accounting and tax departments set up, so they can stay on the right side of Uncle Sam’s balance sheet.
Not sure if you have any tax liabilities that you’re responsible for this year? Consult with Craig S. Hanson, CPA to see what taxes you might owe before they sneak up on you.