Define After-Tax Income

 

What Is Income After Taxes?

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.

TAKEAWAYS IMPORTANT

• Gross income less federal, state, and withholding taxes equals after-tax income.

• After-tax income is the amount of money left over after taxes for a consumer or business to spend.

• Businesses calculate after-tax income in a similar way to people, except instead of identifying gross income, they start by defining total revenues.

After-Tax Income: What It Is and What It Isn't

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.

1 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 the amount of income tax owed is known as after-tax income.

Consider the following illustration: Abi Sample makes $30,000 per year and deducts $10,000 in expenses, resulting in a taxable income of $20,000 per year. Their federal income tax rate is 15%, which means they owe $3,000 in taxes. The difference between gross earnings and income tax ($30,000 - $3,000 = $27,000) is the after-tax income.

When determining after-tax income, individuals can additionally account for state and local taxes. Sales and property taxes are also deducted from gross income in this way. Abi Sample pays $1,000 in state income tax and $500 in local income tax, resulting in an after-tax income of $25,500 ($27,000 - $1500 = $25,500).

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

Calculating a Company's After-Tax Profit

After-tax income is calculated in a similar way for enterprises and individuals. Rather than calculating gross income, businesses start by calculating total revenues. The income statement's business expenditures are reduced from total revenues to produce the firm's income. To arrive at taxable income, any additional applicable deductions are removed.

The taxable income is the difference between total revenues and company costs and deductions, on which taxes will be due. The after-tax income is the difference between the business's income and the income tax owed.

Retirement Contributions (After-Taxes and Pre-Taxed)

The words after-tax and pre-tax income are frequently used to refer to contributions to a retirement plan or other benefits. If a person makes pretax contributions to a retirement account, for example, such payments are deducted from their gross salary. The employer will compute payroll taxes after making deductions from the gross salary amount.

After these reductions from the gross salary amount, Medicare contributions and Social Security payments are determined on the difference. If an employee makes after-tax contributions to a retirement account, the employer deducts the retirement contributions from the employee's gross salary after applying taxes.