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The term "after-tax income" refers to the money that an individual or a business has left over after paying all necessary taxes. Another name for it is disposable income or income after taxes. It stands for the available net income for consuming, saving, and investing.
Why is after-tax income important?
The amount of money actually accessible for spending or investing can be determined by looking at after-tax income. It may also be a sign of a company's success or of a person's financial stability. The tax burden or the tax rate that applies to one's income can be calculated by comparing the after-tax income to the gross income or total revenue.How is after-tax income calculated?
The formula for calculating after-tax income is simple:After-tax income = Gross income - Total taxes
Gross income is the amount of money received before any taxes are subtracted. It can consist of pay, benefits, incentives, dividends, interest, rent, royalties, and other types of income. The sum of all taxes that are levied on gross income is known as total taxes. These can consist of income taxes from the federal, state, and municipal governments as well as withholding taxes, sales taxes, property taxes, and other taxes.
For example, suppose an individual earns $60,000 in gross income and pays $15,000 in total taxes. Their after-tax income would be:
After-tax income = $60,000 - $15,000
After-tax income = $45,000
Similar calculations are used for corporations, however net income is used in place of gross income. The difference between total revenue and entire costs is known as net income. It represents a company's gain or loss. The corporate income taxes that are applied to the net income are the total taxes.
For example, suppose a corporation has $100,000 in total revenue and $40,000 in total expenses. Its net income would be:
Net income = $100,000 - $40,000
Net income = $60,000
If the corporate tax rate is 25%, its total taxes would be:
Total taxes = 25% x $60,000
Total taxes = $15,000
Its after-tax income would be:
After-tax income = $60,000 - $15,000
After-tax income = $45,000
What factors affect after-tax income?
There are many factors that can affect after-tax income, such as:- The volume and sources of gross or net revenue
- The various income levels and categories' corresponding tax rates
- The tax credits and deductions that might lower taxable income or tax obligations
- The address and jurisdiction of the home or business
- The filing status and dependents of each person
- Corporation ownership and its legal form
How can after-tax income be increased?
There are several strategies that can help increase after-tax income, such as:- Raising income or spending less to increase gross or net incomeÂ
- Lowering total taxes by utilizing tax credits and deductions
- Selecting a retirement or investment strategy that is tax-efficient
- Moving to a state or nation with cheaper taxes
- Modifying the filing status or legal form to maximize tax advantages
