Definition
After-tax income, also known as after-tax cash flow, is the net income an individual or business has left after all applicable taxes have been subtracted from the gross income. This measure is a more accurate reflection of the actual financial health than gross income, as it considers the mandatory tax deductions that reduce the amount of money available for personal or business use.
Examples
Example 1: Individual Income
John earns a gross salary of $70,000 a year. After federal, state, and local taxes totaling $15,000, his after-tax income is $55,000. This $55,000 is the money John has available for expenses, savings, and investments.
Example 2: Business Income
A small business generates $200,000 in gross revenue in one fiscal year. After deducting $50,000 for operational expenses and $30,000 for taxes, the business’s after-tax income is $120,000. This is the remaining amount available for reinvestment, savings, or distribution to shareholders.
Frequently Asked Questions
1. How is after-tax income calculated?
After-tax income is calculated by subtracting total income taxes from the gross income. Formula: After-tax income = Gross income - Total taxes
2. Why is after-tax income important?
After-tax income provides a more accurate picture of an individual’s or business’s available resources, as it reflects the actual amount of money that can be utilized after tax obligations are met.
3. Does after-tax income affect financial planning?
Yes, after-tax income significantly affects financial planning since it determines the actual funds available for living expenses, savings, investments, and other financial goals.
4. Can after-tax income be increased?
Increasing after-tax income can occur by raising gross income, reducing taxable income through deductions and credits, or optimizing tax strategies to lower taxable liabilities.
5. Is after-tax income the same for businesses and individuals?
Conceptually, yes. Both refer to the net income remaining after taxes. However, the specific taxes and deductions applicable can differ between individuals and businesses.
Related Terms
Gross Income
Gross income is the total income earned before any deductions, including taxes. For individuals, it includes wages, salaries, bonuses, and other forms of earnings. For businesses, it includes total revenue generated from sales or services.
Taxable Income
Taxable income is the portion of gross income subject to taxes after accounting for deductions, exemptions, and credits.
Net Income
Net income, often synonymous with after-tax income in business contexts, refers to the total earnings after all expenses, including taxes, have been deducted.
Adjusted Gross Income (AGI)
AGI is an individual’s total gross income minus specific deductions allowed by the IRS, affecting the amount of income subject to taxes.
Online Resources
- Internal Revenue Service (IRS) - Comprehensive resource for U.S. tax codes and filing information.
- TurboTax - Tools and articles for calculating and understanding after-tax income.
- Investopedia - Articles and insights on personal and business finance impact due to taxes.
References
- “Investopedia: After-Tax Income.” Investopedia, https://www.investopedia.com/terms/a/aftertaxincome.asp.
- “Internal Revenue Service (IRS): Understanding Taxes and Your Salary.” IRS, https://www.irs.gov.
Suggested Books for Further Studies
- “Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes” by Tom Wheelwright
- “The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions” by Mark J. Kohler
