Taxes are a government’s primary source of revenue to fund essential services, including public safety and defense, road building, and education. Governments levy taxes on citizens and businesses to collect money for these purposes and to help stimulate the economy. Taxes can be imposed at federal, state, local, and special-purpose levels. They may be levied on different income, property or activities, and are often imposed without offsetting one against another (except for excise taxes, which tend to be levied on a unit basis such as fuel or cigarettes).

The term “tax liability” refers to the total amount of tax that a person or business is legally obligated to pay. It can be calculated by adding together a number of components — including the various forms of earned income, investment and capital gains, and deductions and reliefs — and then applying applicable tax rates to that figure. For most taxpayers, the calculation begins with a base of annual financial statement income. Depending on circumstances, this can be modified by the inclusion or exclusion of items like mortgage interest, charitable contributions, or medical expenses.

Many people have multiple tax situations, and understanding the diversity of their obligations is critical to effective tax planning. In addition to individual income taxes, the article also discusses taxes on self-employment and other types of earned income as well as the differences between regular and alternative minimum tax. Moreover, it provides an overview of the three main categories of taxes: taxes on what you earn, taxes on what you buy, and taxes on what you own.