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What is After-Tax Income?
Diane Goettel
Diane Goettel
After-tax income is the amount of money that a company or an individual worker has after all taxes have been deducted from the company's or person's taxable income. There are a number of types of taxes that can be deducted from one's income including federal taxes, state taxes, and withholding taxes. Another term for after-tax income is "income after taxes." When the term is applied to individuals instead of companies, it is sometimes called "take-home pay".
The amount of money that a person or company has in after-tax income is the amount that can be spent on present expenses and investments or can be allocated to a savings plan. This is also sometimes called "disposable income" because it can be spent at will. However, it is quite common for many people to have to spend most of their after-tax income on their rent or mortgage, utility bills, cost of food, and cost of transportation, among other daily expenses.
In order to properly assess cash flow, it is important for both individuals and companies to consider their after-tax income, not the amount of money that they make prior to taxes. Without taking taxes into account, finance projections can be incorrect by a wide margin and can lead to financial troubles later on. Without considering after-tax income, spending and saving projections will include monetary figures that are larger — much larger in some cases — than the amount of money that the person or company will actually have on hand after taxes have been deducted.
There are some deductions to income that are not taxes, such as deductions for health care plans and retirement plans. Deductions for retirement plans are sometimes deducted on a pretax basis. This means that the person will not pay taxes on the money as it is invested in the retirement plan. However, the money will be taxed when it is withdrawn in the future. For people who have these sorts of deductions to their paychecks, it is important to consider their income after both taxes and these sorts of savings deductions for all of the same reasons described above.
For most people, it is quite easy to calculate after-tax income. Many companies give their employees paychecks that include information on all of the deductions. The paychecks will show both pre-tax income and after-tax income. This way the employee can project after-tax income on a monthly, quarterly, or annual basis.
Diane Goettel
In addition to her work as a freelance writer for WiseGEEK, Diane is the executive editor of Black Lawrence Press, an independent publishing company based in upstate New York. She has also edited several anthologies, the e-newsletter Sapling, and The Adirondack Review. Diane has a B.A. from Sarah Lawrence College and an M.A. from Brooklyn College.
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Diane Goettel
In addition to her work as a freelance writer for WiseGEEK, Diane is the executive editor of Black Lawrence Press, an independent publishing company based in upstate New York. She has also edited several anthologies, the e-newsletter Sapling, and The Adirondack Review. Diane has a B.A. from Sarah Lawrence College and an M.A. from Brooklyn College.
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![After-tax income refers to the amount of money an individual has after all taxes have been deducted from his or her taxable income.]()
By: Igor MojzesAfter-tax income refers to the amount of money an individual has after all taxes have been deducted from his or her taxable income.
Discussion Comments
I can remember how great it was to be living at my parents house while working my first job. Basically, almost all of my after-tax income was disposable income, so I could buy anything I wanted.
It wasn't until my car broke down and I had to buy a new one that I came to be more responsible with money. I reserved money from each check to go toward my monthly car payment.
I do miss the days of living at home and going shopping every weekend. I miss eating out a lot and going on vacation every year.
I live in the real world now, where after-tax income goes to bills and not much else. It is a rare and treasured thing when I finally do have enough to spend on something I want.
I had to figure out my after-tax income every week once I became self-employed. If I didn't put aside a certain percentage of each check in a savings account, I wouldn't have enough money to pay my taxes at the end of the year.
I used an income tax table to figure out how much to withhold. Then, I took that much out of every check and transferred it to my savings account.
I refused to touch the money in this account until time to pay the IRS. I knew that I would get in big trouble if I used the money for something else.
@kylee07drg - I'm always amazed at the difference between my pre-taxed earnings and my after-tax income. What's sad to me is that the more I make, the more I lose to taxes.
Granted, I would still take home more than usual if I work overtime. However, it seems it should be even more somehow.
Percentages of my income go to the retirement plan, health insurance, state and federal taxes, Medicare, and Social Security. Usually, a couple hundred dollars are withheld from each check.
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