After-Tax Income Definition

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After-Tax Income Definition

What Is After-Tax Income?

After-tax income is the net income after all federal, state, and withholding taxes have been deducted. After-tax income, also known as income after taxes, is the amount of disposable income available to a customer or business.

Key Takeaways

  • After-tax income is gross income less federal, state, and withholding tax deductions.
  • After-tax income is the amount of money that a customer or business has available to spend.
  • Businesses compute after-tax income in the same way that people do, except instead of calculating gross income, they begin by defining total revenues.

Understanding After-Tax Income

The IRS Form 1040 is used by the majority of individual tax filers to compute their taxable income, income tax payable, and after-tax income. Deductions are removed from gross income to determine after-tax income. The difference is the taxable income, which is subject to income taxes. The difference between gross income and income tax owed is referred to as after-tax income.

Consider the following scenario: Abi Sample earns $30,000 and deducts $10,000, resulting in a taxable income of $20,000. Their federal income tax rate is 15%, thus the tax owed is $3,000. The difference between gross earnings and income tax is $27,000, or the difference between $30,000 and $3,000 ($30,000 – $3,000 = $27,000).

Individuals may also include state and local taxes in their after-tax income calculations. Sales and property taxes are also deducted from gross income in this manner. Using the same example as before, Abi Sample pays $1,000 in state income tax and $500 in municipal income tax, resulting in an after-tax income of $25,500 ($27,000 – $1500 = $25,500).

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It is critical to employ an anticipated after-tax net cash projection when assessing or predicting personal or business cash flows. Because after-tax cash flows represent what the company has available for consumption, this estimate is more relevant than pretax income or gross income.

Calculating After-Tax Income for Businesses

The calculation of after-tax income for companies is similar to that of individuals. Instead of calculating gross income, businesses start by calculating total revenues. Business costs are deducted from total revenues to produce the firm’s income, as shown on the income statement. Finally, any additional applicable deductions are deducted to arrive at taxable income.

The difference between total revenues and company expenditures and deductions is the taxable income, which is subject to taxation. The after-tax income is the difference between the business’s income and the income tax owed.

After-Tax and Pretax Retirement Contributions

After-tax and pre-tax income are often used to refer to retirement contributions or other benefits. For example, if someone contributes to a retirement account before taxes, the payments are deducted from their gross earnings. The employer will compute payroll taxes after deducting the gross salary amount.

Medicare contributions and Social Security payments are computed on the difference between the gross salary and the deductions. If, on the other hand, the employee makes after-tax contributions to a retirement account, the employer deducts the retirement contributions from the employee’s gross income.

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