What will be my tax liability if I just return the house back to the bank?
This is something that you will need to carefully consider with your tax professional and your mortgage lender. Every circumstance is different, and it is impossible to tell you what your liability will be without knowing much more about your situation.
By involving your lender in the discussion, you are given the chance to explain why you cannont make the mortgage payments and how your local market has changed so that you cannot sell the home in order to pay back the mortgage. If your lender agrees that accepting your keys "in lieu of foreclosure", you may be in a better position financially than if you simply stop paying on the loan.
In general, if you cannot sell to pay back the loan in full, the bank does NOT want your house. When they have to take title to a home, care for it, and then resell it at a discounted, foreclosure price, they lose tens or even hundreds of thousands of dollars. If the lender feels that your default was avoidable, you can expect that they will report your derogatory credit and hold you accountable for as much as legally possible in your area. However, if it is evident that you considered all options and worked with them to find a solution, they are likely to report your status differently . . . to the credit bureaus, the IRS, etc.
Make sure you consult a tax professional, the lender, and perhaps an attorney in your area familiar with " short sales" before taking the next step.