What does tax liability refer to?

Tax liability specifically refers to the amount of taxes an individual or business is legally obligated to pay to the government for a given tax period before any tax credits or advance payments are taken into account. This figure is determined based on taxable income, which is calculated by taking gross income and applying any allowable deductions. Understanding tax liability is crucial as it represents the taxpayer's responsibility to pay taxes; knowing this amount helps taxpayers plan for payments and understand potential refunds or balances due once credits and prepayments are applied.

The other choices do not capture this definition. Gross income comprises all income received, tax refunds indicate money returned to the taxpayer, and deductions are subtracted from gross income to compute taxable income, but none of these define the final liability owed.