Tax Refund vs. Tax Liability: What’s the Difference?

Tax Refund vs. Tax Liability: What’s the Difference?

Although taxes can be complicated and there are several factors that have gone into the changes in refunds we’ve seen this year, it’s clear that many do not understand the difference between their tax refund vs. tax liability. Read on to gain a better understanding of your tax refund vs. your tax liability.

Tax Basics

The taxes you owe are based on several things, most notably your taxable income and your filing status (more on these later). Our tax system is graduated, meaning you’ll pay various tax rates only on the income that falls within that bracket.

Tax refunds are the difference between withholding’s from your paychecks and your tax liability amount. The amount of money withheld from each pay check has a direct impact on your tax refund at the end of the year, and will determine whether you get a bigger refund, a smaller refund, or if you owe taxes.

Tax Refund vs. Tax Liability 1. Tax Refund

If you owe $4,000 in taxes and you have $2,000 in tax credits, your tax liability is reduced by the entire $2,000, not just 10% of the $2,000. Your net tax liability is now $2,000, which is $800 less than the deduction.

Tax Refund vs. Tax Liability 1. Tax Liability

If you really want to know the impact of the new tax law you need to compare your tax liability for this year with that of last year. If you’re tax liability (the amount you owe) is less, then your taxes have lowered. On the other hand, if your tax liability is more, then you are paying more in taxes compared to last year.

Do You Owe More of Less?

How Come My Refund is Smaller, Or Worse, I Owe?

The answer for why your refund is smaller, or why you may owe taxes, this year is partially based on your individual situation and how changes in the tax brackets, tax percentages, and deductions have affected you.

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