Calculating after-tax income is simple. You subtract your total taxes from your total personal income. If you get a regular paycheck with tax withholding, your after-tax income is the amount you receive in each paycheck. If you pay estimated taxes throughout the year, your after-tax income is your total income minus any estimated tax payments. After-tax income is important to individual taxpayers because it’s the amount of money you have to pay your bills and, if you’re able, to save and invest. But its importance doesn’t stop there. After-tax income also matters to the economy as a whole. This is because it’s also how much money you have to put back into the economy in the form of your consumer spending. In fact, when a major tax proposal is made, it’s common for the Joint Committee on Taxation (JCT) to prepare an analysis of how it will affect taxpayers’ after-tax income by income bracket.
An Example of After-Tax Income
If you earn $100,000 and pay $20,000 in taxes this year, your after-tax income for the year is $80,000. This is how much you can spend on both mandatory expenses such as a mortgage or utilities, and discretionary expenses such as clothing, travel, or household goods.
Types of After-Tax Income
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.
After-Tax Income on a Paycheck Basis
Sometimes, after-tax income means the amount of money you have leftover after each paycheck before post-tax deductions are taken out. Remember, tax withholdings on a paycheck are merely estimates of how much tax you will owe for the year. This means that the amount you get in each paycheck is not necessarily your exact after-tax income. 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.
After-Tax Income on a Federal Income Tax Return Basis
Often, after-tax income is used when talking about your actual federal income tax liability for the year. Using the term in this sense is common when lawmakers discuss changes to major tax policies.
After-Tax Income on a Holistic Basis
Often, when people talk about after-tax income, they’re only thinking about federal taxes. This includes federal income taxes as well as Social Security taxes and Medicare taxes. Sometimes, though, after-tax income can be applied more holistically. In this case, it would also take into account other taxes, such as state and local income taxes and property taxes.
After-Tax Income vs. Before-Tax Income
In contrast to after-tax income, before-tax income is a taxpayer’s total income before taxes. Although two individuals may have the same before-tax income, they may have very different after-tax income at tax time because of filing status, deductions, and other factors. How you earn your income can also change your after-tax income compared to someone who earns the same amount in a different way. A self-employed individual may have the same before-tax income as an employee. However, due to the different way they’re taxed, their after-tax incomes could be quite different. For example, many sole proprietors are eligible for up to a 20% qualified business income deduction. This means that a sole proprietor would pay tax on up to 20% less of their income than an employee who earns the same amount. This can lower taxes, which means a higher after-tax income.
