What is after-tax income (plain definition)
– After-tax income is the cash left after you subtract income taxes from your gross income. In other words, it is the money an individual or firm actually has available to spend, save, or invest once income taxes have been paid.
Key terms (defined)
– Gross income: total earnings before any deductions or taxes.
– Deductions: amounts subtracted from gross income to arrive at taxable income (examples include certain retirement contributions or permitted itemized deductions).
– Taxable income: gross income minus deductions; this is the base on which income tax is calculated.
– Income tax due: the tax calculated on taxable income (federal, and if applicable state and local income tax).
– After-tax income (net of tax): gross income minus income tax due (and minus state/local income taxes if you include them).
Basic formulas (conceptual)
– Taxable income = Gross income − Deductions
– Income tax due = Taxable income × applicable tax rate(s) (or calculated using the tax table/rates)
– After-tax income = Gross income − Income tax due (− State/local income taxes, if included)
Step-by-step: computing after-tax income for an individual
1. Gather gross income for the period (salary, wages, business income, etc.).
2. List allowable deductions and subtract them from gross income to get taxable income.
3. Apply the relevant tax schedule or rates to compute federal income tax due. Add any state and local income taxes you want to include.
4. Subtract total income taxes from gross income. The result is after-tax income.
Worked numeric example (individual)
– Gross income: $30,000
– Deductions: $10,000 → Taxable income = $20,000
– Assume a simplified federal tax rate of 15% → Federal tax due = 0.15 × $20,000 = $3,000
– After federal tax: $30,000 − $3,000 = $27,000
– If the person also pays $1,000 in state income tax and $500 municipal income tax, subtract those: $27,000 − $1,000 − $500 = $25,500 final after-tax income.
Computing after-tax income for a business (summary)
1. Start with total revenues for the period.
2. Subtract business operating expenses recorded on the income statement to arrive at pre-tax business income.
3. Subtract any additional business-specific deductions to calculate taxable income.
4. Compute corporate or business income tax due and subtract it from pre-tax income to get after-tax income (the cash the business retains after income taxes).
Small numeric example (business)
– Total revenue: $200,000
– Operating expenses: $120,000 → Pre-tax income = $80,000
– Assume a flat corporate tax of 21% → Tax due = 0.21 × $80,000 = $16,800
– After-tax income = $80,000 − $16,800 = $63,200
(Assumption: simple example using a single flat rate; real corporate tax calculations may be more complex.)
Pretax vs after-tax retirement contributions (brief)
– Pretax contribution: money you put into certain retirement accounts before income tax is calculated. Those pretax contributions reduce taxable income today and thus lower income tax due. Payroll taxes (Social Security and Medicare) are typically calculated on wages after these pretax deductions.
– After-tax contribution: you pay income tax first, then contribute to the retirement account. Taxes are applied to gross pay and the contribution is made from the net amount.
Checklist — what to gather before you compute after-tax income
– Gross income for the period (pay stubs, invoices, revenue reports)
– All deductions that reduce taxable income (retirement pretax contributions, allowed itemized deductions, etc.)
– Applicable federal tax rules or marginal rates (or tax table)
– State and local income tax amounts to include (if you want a more complete picture)
– Payroll taxes you need to consider (Social Security, Medicare) and whether contributions were pretax or after-tax
– Any tax credits or special adjustments that could affect tax due
Notes and assumptions
– The worked examples use simplified flat rates and ignore progressive tax brackets, tax credits, withholding nuances, and other complexities that can change the final tax due.
– Sales tax and property taxes are not part of gross income; when people want a broader view of disposable income they may subtract those living taxes from after-tax income to see what remains for consumption.
– For accurate personal or corporate projections use actual tax schedules, consult official forms, or work with a tax professional.
Reputable sources
– Investopedia — After‑Tax Income: https://www.investopedia.com/terms/a/aftertaxincome.asp
– Internal Revenue Service — About Form 1040: https://www.irs.gov/forms-pubs/about-form-1040
– Internal Revenue Service — Retirement Topics: Contributions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions
Educational disclaimer
This explainer is for educational purposes only. It does not constitute tax, legal, or investment advice. For personalized tax calculations or planning, consult a qualified tax professional or use official tax tools and publications.