Loading the player...

What does 'Net of Tax' mean

Net of tax is the amount after adjusting 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'

Net of tax is basically the amount left over after taxes have been deducted. it is also known as after-tax. The net of tax figure is important because it allows you to factor in just how much of an impact taxes can have on a person or other entity. For investors, the net of tax figure can provide a good window into how companies and businesses are operating after taxes are deducted, and can answer key questions like what Company A's actual cash flow looks like or how big Company B's bottom line is. 

A Simple Net of Tax Example

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 Strategies in the Investment World

It 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 investor's 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 another $100,000 in bonds. The investor also has an individual retirement account (IRA) with $100,000 in stocks and $100,000 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:

                    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

Compared to a trade in the 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. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  2. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  3. Income Tax Payable

    Income tax payable is an account in the balance sheet's current ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
  6. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
Related Articles
  1. Taxes

    How Much Tax Do You Really Pay?

    When you add direct and indirect taxes together, your real tax rate is much more than you expected.
  2. 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.
  3. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  4. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  5. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  6. Taxes

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
  7. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  8. Insights

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

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

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  10. Taxes

    Capital Gains Tax 101

    Find out what a capital gain is, how it is calculated, how taxes are applied to your investment returns and how you can reduce your capital gain tax burden.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center