What is a tax obligation?
Tax obligations are payments that individuals, businesses, or other businesses must pay to federal, state, or local tax authorities.
Tax obligations generally arise when income is earned and when income is generated from an investment or sale of other assets. Local or state sales tax may be levied when you purchase the item. (In some countries, the United States does not impose sales tax.)
People may not be liable for income tax if the total unpaid tax amount is zero or if their income is below the level that requires a tax return.
- Tax obligations are the total amount of tax obligations that an individual, business, or other entity must pay to a tax authority such as the Internal Revenue Service (IRS).
- Income tax, sales tax and capital gains tax are all forms of tax liability.
- Taxes are levied by various tax authorities, including federal, state, and local governments. These tax authorities use the money to pay for services such as road repairs and national defense.
- Both individuals and businesses can reduce their tax obligations by claiming deductions, tax exemptions, and tax credits.
Understand tax obligations
Taxes are levied by various authorities, including federal, state, and local governments, and use the funds to pay for services such as road repairs and national defense.
When a taxable event occurs, the taxpayer needs to know the tax base of the event and the tax rate of the tax base.
Sales tax and company salary are in the form of tax obligations. When a company sells a product, many states and some local governments charge sales tax, which is a percentage of each sale and is paid by the customer. The company sends the collected sales tax to the tax authorities on a monthly or quarterly basis. The company withholds income tax and social security and Medicare taxes from employee wages and immediately remits them to the federal government.
Individual or corporate tax obligations do not include the current year alone. It takes into account all years the tax is paid. This means that if you have any unpaid taxes (taxes that have remained unpaid since the previous year), they will also be added to your tax obligations.
Example of tax obligation
The most common type of legal liability for Americans is tax on income. For example, suppose Anne earns $ 60,000 in total income. This will be reported in the IRSW-2 form at the end of the year. If the federal tax rate on that level of income is 22%, Anne’s tax obligation will be $ 8,949 based on the 2020 tax rate.
In particular, Anne owe 10% on the first $ 9,950 income, 12% on the next $ 30,575, and 22% on the last $ 19,475.
Assume that Anne’s W-4 withholds $ 6,500 in federal tax and pays $ 1,000 in tax that year. When Anne submits Form 1040, her individual tax return, the remaining tax obligations are the $ 8,949 tax obligation minus $ 6,500 withholding and $ 1,000 payment, or $ 1,449.
Due to Hurricane Aida, some residents and business owners in Louisiana, Mississippi, New York, and New Jersey are allowed to extend the deadline for filing and paying to the IRS. Most are related to future due dates for quarterly submissions and payments. For more information, go to the IRS Tax Exemption Page and click 2021.
How to tax capital gains
When a taxpayer sells an investment, real estate, or other asset for profit, the individual is obliged to pay taxes on the profit.
For example, suppose Jamal buys 100 shares of XYZ common stock for $ 10,000 and sells the security for $ 18,000 five years later. A profit of $ 8,000 is considered the tax base for this taxable event. In this case, the transaction is a long-term capital gain because the stock has been held for more than a year.
Capital gains tax rates may differ from income tax and other tax calculation rates. If the tax rate is 10%, the tax obligation is $ 800 and Jamal will include this calculation in his personal 1040 tax return.
Special considerations: line 16
Did you fill out Form 1040? Line 16 on page 2 of Form 1040 is your total tax obligation to the IRS.
The total can look high, so it can rotate the stomach at first. However, when calculating your tax obligations, you will adjust to the withholding federal income tax, deductions, tax exemptions, and tax credits to calculate the amount of unpaid tax currently payable.
If you overpay, you end up with a refund. On the other hand, if you pay too little, the IRS will owe you a little more.