How is a tax liability typically determined?

A tax liability is primarily determined by applying the tax rate to taxable income, which reflects the income that is subject to taxation after accounting for relevant adjustments, deductions, and exemptions. This process establishes the amount of tax owed based on the applicable tax brackets or rates set by the governing tax authority.

To evaluate tax liability accurately, one starts with gross income and makes necessary adjustments—such as deductions and exemptions—to arrive at taxable income. Once taxable income is established, the corresponding tax rates are applied to calculate the overall liability. The structuring of the tax rates usually involves different brackets, where portions of the taxable income are taxed at varying rates. Therefore, applying the correct tax rate to the taxable income is a crucial step in accurately determining how much tax needs to be paid.

The other options may incorporate elements of the overall tax calculation but do not provide the complete or direct method for determining tax liability. For instance, while it is necessary to consider deductions in arriving at taxable income, simply stating that deductions are subtracted from gross income does not encompass the application of tax rates. Similarly, calculating an average tax rate or assessing penalties for prior taxes does not directly relate to the determination of current tax liability.