After-Tax Income Definition, Calculate, Formula

After-tax income is the amount of money a taxpayer has after paying taxes. You’ll typically calculate this on an annual basis, but you can also do it on a paycheck-by-paycheck basis. 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. “Net” refers to the amount left over after reducing (including) a specific amount in the calculation.

The final amount might be lower (if you have a tax liability) or higher (if you get a tax refund) than what you’re required to pay. Although the concept of after-tax income seems straightforward, the term can be used in different ways to mean different things. These differences mostly depend on which taxes are being used to calculate your after-tax income.

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Interest paid on certain bonds issued by governmental entities is treated as tax-exempt income. Interest paid on federal bonds and Treasury securities is exempt from state and local taxation. For the final step in calculating your taxable income, you will need to take your AGI, calculated above, and subtract all applicable deductions.

Net of tax strategies can be important in the investment and financial planning world. Since investors must pay taxes on their capital gains, there are many strategies they can deploy to reduce or avoid the impact of taxes. Regarding income taxes on corporations, nearly all countries assess after tax income definition them, but the provisions and rates differ widely. Most U.S. cities and counties do not impose this tax, but some do, affecting approximately 10% of the total U.S. population. In general, the highest city tax rates in the U.S. are centered around large cities such as New York City.

Retirement Accounts

For income tax purposes, the tax code attempts to define income to reflect taxpayers’ actual economic position. The general tax framework applies to taxpayers’ personal revenue (other than tax-exempt income) from all sources and offsets such revenue with deductions for expenses and losses to determine taxable income. For most people, income is their total earnings in the form of wages and salaries, the return on their investments, pension distributions, and other receipts. For businesses, income is the revenue from selling services, products, and any interest and dividends received with respect to their cash accounts and reserves related to the business.

• For purchases, you’ll need to consider the taxes and subtract them from the total amount you paid.
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• For those who do not use itemized deductions, a standard deduction can be used.
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• This will bring the number of states with no income tax to nine by 2024.

The United Kingdom for a long time applied the income tax on corporations (companies) purely as a supplement to the taxation of individuals. This system was modified in 1937 and replaced in 1965 by a separate corporation tax. The Internal Revenue Service (IRS) collects taxes and enforces tax law in the United States. The IRS employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc. The agency collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.

After-Tax Income vs Pre-tax Income in Retirement

This is the amount of income subject to taxes after allowable deductions. For individuals, deductions can include certain types of insurance premiums, retirement contributions, and mortgage interest. An account holder who changes jobs can roll over the money into a similar account available at the new job without paying any taxes.

This is passed through to shareholders based on their ownership stake in the S corporation. If you’re a shareholder, earnings, losses, and deductions are reported on your personal income tax return. It is recommended to consult with a tax professional or financial advisor. Net income after taxes is not the total cash earned by a company over a given period, since non-cash expenses, such as depreciation and amortization are subtracted from revenue to get the NIAT.

At the end of 2023, New Hampshire will begin phasing out these taxes, and all personal income in the state will be tax free by 2027. Certain investments, like housing authority bonds, are exempt from income taxes in some cases. Due to this, if allowed, non-exempt employees have the opportunity for a bigger paycheck by working over 40 hours per week. While most companies tend to set their overtime rates at the minimum, which is time and one-half, companies that provide an overtime rate of two times the regular rate are not out of the ordinary. Exempt employees, otherwise known as salaried employees, generally do not receive overtime pay, even if they work over 40 hours. For more information about overtime, non-exempt or exempt employment, or to do calculations involving working hours, please visit the Time Card Calculator.

In the financial industry, gross and net are two key terms that refer to before and after paying certain expenses. In general, ‘net of’ refers to a value found after expenses have been accounted for. Therefore, the net of tax is simply the amount left after taxes have been subtracted. After-tax deductions are made after applicable payroll taxes are deducted and pre-tax deductions are made from employee wages. When costs for things like equipment, machinery, and buildings can only be deducted over several years instead of immediately, the business is not able to recover the full cost of its investment.