Loading the player...

What does 'Net Of Tax' mean

Net of tax is an accounting figure that has been adjusted for the effects of income tax. Net of tax is most commonly calculated by taking gross figures, like the cash collected from the sale of an asset, and subtracting the taxes paid. Net of tax could also be used to show the final amount after accounting for the tax savings, for example on a loss that allows a tax deduction.

BREAKING DOWN 'Net Of Tax'

In most cases, net of tax figures are used for the sake of clarity. If a company sells one of its factories for $1 million, but $400,000 of that is eaten up by taxes, the company may present the net of tax figure of $600,000 because that is the amount being added to the bottom line. The tax figure doesn't disappear, however, as it is accounted for in the gross figure given for income tax expense, and may be referenced specifically if it was a significant contributor to an unusually high tax bill.

Net of tax, also known as after-tax, is an important concept in the investment and financial planning world. Since investors must pay taxes on their capital gains, many strategies are employed to reduce the impact of taxes to ensure that an investors net of tax portfolio is as large as possible. One major strategy to reduce the impact of taxes on a portfolio is known as asset location, which refers to what types of assets investors place into the different types of accounts available to them. Another strategy is to invest in tax-efficient securities, such as municipal bonds, which aren't subject to certain types of taxes, depending on a few factors.

Net of Tax Examples in Investment Portfolios

As a simple example of how using the right strategy can increase an investor's after-tax portfolio, consider the following. An investor has an individual investment account with $100,000 invested in stocks and $100,000 invested in bonds. The investor also has an individual retirement account (IRA) with $100,000 in stocks and $100,000 invested in bonds. He decides that he wants to reduce his overall stock exposure by $100,000 and place that money into bonds. For simplicity, assume that each of the four positions have long-term capital gains of $50,000.

Were he to sell $50,000 of stocks from the individual account, the situation would be:

Individual Account

Stocks = $0 with a tax liability of $50,000 x 15%, or $7,500. (Thus, only the net $92,500 could be invested in bonds.)

Bonds = $192,500

IRA Account

Stocks = $100,000

Bonds = $100,000

Given this trade, the investor's total net of tax portfolio would be equal to $392,500. However, if the trade was made in the tax-free IRA account, the net of tax portfolio amount would still equal $400,000, since no taxes are due on trades made in IRAs.

RELATED TERMS
  1. Income Tax Payable

    Income tax payable is an account in the balance sheet's current ...
  2. Direct Tax

    A tax that is paid directly by an individual or organization ...
  3. Capital Gains Tax

    A capital gains tax is a type of tax levied on capital gains ...
  4. Tax Break

    A tax break is a savings on a taxpayer's liability. A tax break ...
  5. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that ...
Related Articles
  1. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  2. Taxes

    Minimizing Taxes on Your Investment Portfolio

    There are several strategies that can help reduce taxes on an investment portfolio.
  3. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  4. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  5. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  6. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your capital gain tax burden.
  7. Taxes

    Minimize Taxes With Asset Location

    Learn how to maximize your investment returns with this tax-minimization strategy.
  8. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  9. Taxes

    Minimizing the Amount of Income Tax You Owe

    The amount of income you receive and tax deductions and credits you take impact how much you'll owe.
  10. Taxes

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center