What Is After-Tax Income?
After-tax income is the net income after deducting all federal, state, and withholding taxes. After-tax income—also called income after taxes and the net of tax amount—represents the amount of disposable income that a consumer or firm has available to spend.
Key Takeaways
- After-tax income is gross income minus deductions of federal, state, and withholding taxes.
- After-tax income is the disposable income that a consumer or firm has available to spend.
- Computing after-tax income for businesses is relatively the same as for individuals, but instead of determining gross income, companies begin by defining total revenues.
Understanding After-Tax Income
Most individual tax filers use some version of theIRS Form 1040to calculate their taxable income, income tax due, and after-tax income. To calculate after-tax income, the deductions are subtracted from gross income. The difference is the taxable income, on which income taxes are due. After-tax income is the difference between gross income and the income tax due.
Consider the following example: Abi Sample earns $30,000and claims $10,000 in deductions, resulting in a taxable income of $20,000. Theirfederal income tax rate is 15%, making the income tax due $3,000. The after-tax income is $27,000, or the difference between gross earnings and income tax ($30,000 - $3,000 = $27,000).
Individuals can also account for state and local taxes when calculating after-tax income. When doing this, sales tax and property taxes are also excludedfrom gross income. Continuing with the above example, 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).
When analyzing or forecasting personal or corporate cash flows, it is essential to use an estimated after-tax net cash projection. Thisestimate is a more appropriate measure than pretax income or gross income because after-tax cash flows are what the entity has available for consumption.
Calculating After-Tax Income for Businesses
Computing after-tax income for businesses is relatively the same as for individuals. However, instead of determining gross income, enterprises begin by defining total revenues. Business expenses,as recorded on the income statement, are subtracted from total revenues producing the firm's income. Finally, any other relevant deductions are subtractedto arrive attaxable income.
The difference between the total revenues and the business expenses and deductions is the taxable income, on which taxes will be due. The difference between the business's income and the income tax due is the after-tax income.
After-Tax and Pretax Retirement Contributions
The terms after-tax and pretax income often refer to retirement contributions or other benefits. For example, if someone makes pretax contributions to a retirement account, those contributions are subtracted from their gross pay. After deductions are made to the gross salary amount, the employer will calculatepayroll taxes.
Medicare contributions and Social Security payments are calculated on the difference after these deductions are taken fromthe gross salary amount. However, if the employee makes after-tax contributions to a retirement account, the employer applies taxes to the employee's gross pay and then subtracts the retirement contributions from that amount.
FAQs
To calculate the after-tax income, simply subtract total taxes from the gross income.
How do you calculate earnings after tax? ›
Earnings after tax (EAT) is the measure of a company's net profitability. It is calculated by subtracting all expenses and income taxes from the revenues the business has earned.
How do you calculate after tax return? ›
Your after-tax real rate of return is calculated by, first, figuring your after-tax pre-inflation rate of return, which is calculated as nominal return × (1 - tax rate). That would be 0.12 × (1 - 0.15) = 0.102 = 10.2%.
How much taxes are taken out of a $1200 paycheck? ›
However , on average , approximately 22 % of a $ 1200 paycheck would be deducted for taxes , which amounts to $ 264 . This includes federal income tax , state income tax , and FICA taxes ( Social Security and Medicare ) .
What is the easiest way to calculate income tax? ›
To calculate income tax, you add all forms of taxable income earned in a tax year. Next, find your adjusted gross income. Then, subtract any eligible deductions from your adjusted gross income.
What is the formula for the real after tax return? ›
We also learned that an after-tax return is the net return to the investor after ordinary income and capital gains taxes are subtracted. The formula for this is as follows: After-tax return on investment = ((P1 - Po) (1 - Tc) / Po) + C1(1 - To) / Po.
Do I calculate my income before or after taxes? ›
Gross annual income is the amount you earn each year before any taxes or other deductions are applied. This includes your salary or wages and any additional income sources such as bonuses, overtime pay, commissions, and interest or dividends from investments.
How do you calculate profit after taxation? ›
Net profit is gross profit minus operating expenses and taxes.
What is the earnings formula? ›
The net income formula can help you calculate your total income and other values more easily. To find your net income, you can use the formula below:Net income = Total revenue - Expenses - TaxesFor example, you may have a total revenue of ₹5,000,000, expenses equal to ₹2,500,000 and taxes equal to ₹1,000,000.
How do you calculate return after tax? ›
Pre-Tax Return
TR% = Tax bracket (in percentage) of investor. So for an FD of 8%, Post tax return = 8 – ( 8 * 30.9/100) = 5.528%. For a person paying tax in the highest tax bracket, the rate of tax is 30.9%.
Calculating the sales tax applied to a purchase is a matter of simply multiplying the tax rate by the purchase price using the equation sales tax = purchase price x sales tax rate. Adding the sales tax to the original purchase price gives the total price paid with tax.
Does social security count as federal tax? ›
Social Security retirement benefits are subject to federal income tax for most people, though a portion of the benefits are exempt from taxes. People with lower total retirement income get larger exemptions. Most states don't tax Social Security. Supplemental Security Income (SSI) is not taxable.
How much an hour is $4000 a month after taxes? ›
Annual / Monthly / Weekly / Hourly Converter
How much is your salary? $4,000 monthly is how much per hour? If you make $4,000 per month, your hourly salary would be $23.08.
How to pay less taxes on a paycheck? ›
Change Your Withholding
To change your tax withholding you should: Complete a new Form W-4, Employee's Withholding Allowance Certificate, and submit it to your employer. Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, and submit it to your payer.
Why am I getting taxed so much on my paycheck? ›
Different income tax brackets apply depending on how much money you make. Generally speaking, a higher percentage is typically taken out of your paycheck if you earn a higher level of income.
How do you solve after tax costs? ›
The After Tax Cost of Debt accounts for the tax deductibility of interest expenses, reducing the overall cost of debt. Its formula is: After Tax Cost of Debt = Pre-Tax Cost of Debt x (1 - Tax Rate).
What does after tax income mean? ›
After-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings.
How do you solve tax in math? ›
Here's how to calculate the sales tax on an item or service:
- Know the retail price and the sales tax percentage.
- Divide the sales tax percentage by 100 to get a decimal.
- Multiply the retail price by the decimal to calculate the sales tax amount.
