What is 'After-Tax Income'
After-tax income is the amount of money that an individual or company has left over after all federal, state and withholding taxes have been deducted from taxable income. After-tax income, also called income after taxes, represents the amount of disposable income that a consumer or firm has to spend on future investments or on present consumption.
BREAKING DOWN 'After-Tax Income'When analyzing or forecasting personal or corporate cash flows, it is important to use an estimated after-tax net cash projection. This is a more appropriate measure than pretax income or gross income because after-tax cash flows are what the entity actually has available for consumption.
Calculating After-Tax Income for Individuals
To calculate after-tax income for individuals, start with an individuals' gross income, and then, subtract deductions. The difference is the individual's taxable income. Income tax is applied to this amount, and the difference between an individual's gross income and his income tax is his after-tax income.
To illustrate with theoretical numbers and tax rates, imagine an individual earns $30,000. He claims deductions worth $10,000, and as a result, he has $20,000 in taxable income. His income tax rate is 15%, making his federal income tax $3,000. The difference between his income tax and his gross earnings is $27,000 and that is the amount of his after-tax income. In most cases, individual tax filers use some version of IRS Form 1040 to calculate their taxable income, income tax due and after-tax income.
If an individual wants to take state or local income taxes into account when calculating his after-tax income, he must calculate his income tax for those entities using the relevant forms. Then, he must subtract those amounts from his gross income. To continue with the above example, if he pays $1,000 in state income tax and $500 in municipal income tax, his after-tax income is $25,500. After-tax income does not take sales tax or property tax into account.
Calculating After-Tax Income for Businesses
Calculating after-tax income for businesses is roughly the same as calculating it for individuals. However, first, businesses must start with their total revenue, and then they must subtract their business expenses to calculate their income for the year. At that point, they can claim any relevant deductions to determine their taxable income and their income tax due. Finally, the difference between their income and their income tax owed is their after-tax income.
After-Tax and Pretax Retirement Contributions
The phrases after-tax and pretax income are often used when talking about retirement contributions or other benefits. For example, if someone makes pretax contributions to his retirement account, those contributions are subtracted from his gross pay, and his employer calculates his payroll taxes. Medicare contributions and Social Security payments are based on the difference. However, if the employee is making after-tax contributions to his retirement account, the employer applies taxes to the employee's gross pay, and then he subtracts the retirement contributions from that amount.