What qualifies as a tax liability?

**Disclaimer**: I am not a tax professional, but this simplified example should help make sense of it for you.

Let's say you're single and you make $60,000/year salary and have $10,000 worth of deductions.

You're in the 25% tax bracket. You owe $5,226.25 plus 25% of the excess over $37,950, which is...

5,226.25 + (60,000 - 37,950 - 10,000) x 25% = $8,238.75

So you have a tax liability of $8,238.75 and will get the full $7,500 credit.

Let's say you're married filing jointly and have a combined income of $75,000 and have $14,000 in deductions.

You're in the 15% tax bracket. You owe $1,865 plus 15% of the excess over $18,650, which is...

1,865 + (75,000 - 18,650 - 14,000) x 15% = $8,217.50

So you have a tax liability of $8,217.50 and will get the full $7,500 credit.

Essentially your tax liability is what you owe after all deductions. It must be greater than $7,500 otherwise the credit maxes out at your tax liability. In other words if your tax liability was $6,000, then your federal tax credit maxes out at $6,000 and the lost $1,500 cannot be carried over to the next tax year. Adjusting your withholdings will

**NOT** change your tax liability, but rather simply allows you to take home more money and have less paid out in taxes. This is a good strategy when you have something like a credit coming as you're not giving me government an interest free loan.