What is After-Tax Income?
After-tax income refers to the net income after deducting all applicable taxes. Therefore, the after-tax income is simply one’s gross income minus taxes. For individuals and corporations, the after-tax income deducts all taxes, which include federal, provincial, state, and withholding taxes. It can also include local taxes, such as sales and property tax. After deducting all applicable taxes, the after-tax income represents the total disposable income available to spend.
- The after-tax income refers to the net income after all deducting all applicable taxes.
- It represents the total disposable income available to spend.
- For corporations, the after-tax income is also referred to as the Net Income After Taxes (NIAT).
Understanding After-Tax Income
To put it simply, after-tax income is essentially total income minus total taxes. It represents the disposable income that an individual can spend. For corporations, the after-tax income allows for a more accurate projection of cash flows because it provides a true indicator of the cash available for spending.
While the calculation for after-tax income seems quite simple, there are many types of taxes that can be deducted. Normally, taxes deducted include federal, provincial, and state taxes. After-tax income calculations can also deduct withholding taxes, which are taxes that are withheld from an individual’s wages and paid directly to the government.
Local taxes, such as sales tax and property tax, may also be deducted in the calculation. In certain jurisdictions, provincial or territorial taxes can also include healthcare premiums. Some jurisdictions also provide tax credits, which are tax reductions provided by the government to encourage specific behavior, such as investment in small businesses. If tax credits are available, it would reduce the taxes deducted and increase the after-tax income.
How After-Tax Income is Calculated
The formula for after-tax income is quite simple, as given below:
To calculate the after-tax income, simply subtract total taxes from the gross income. For example, let’s assume an individual makes an annual salary of $50,000 and is taxed at a rate of 12%. It would result in taxes of $6,000 per year. Therefore, this individual’s after-tax income would be $44,000.
For corporations, calculating the after-tax income follows the same formula, except the gross income is replaced with net income. When calculating year-end financials, corporations will disclose their net income on the income statement. The net income is equal to total revenue minus expenses and losses.
After the net income is calculated, the corporation will deduct all applicable taxes to find the after-tax income. Generally, corporations want to demonstrate higher after-tax income as it is a sign of profitability.
Net Income After Taxes (NIAT)
Net income after taxes (NIAT) is a similar concept to after-tax income, except it applies to corporations rather than individuals. Also referred to as the profit or the net earnings, the net income after taxes refers to the remaining earnings after deducting all expenses (including taxes).
Aside from taxes, the net income after taxes also deducts operating expenses, interest, dividends, and depreciation. In the context of corporate finance, the net income after taxes is an important number because it represents the remaining profit for owners and shareholders. For publicly traded companies, a higher NIAT typically results in a higher share price.
Let’s assume an individual in San Francisco makes an annual salary of $75,000. In California, individuals must pay federal income taxes of 14.13% and state income taxes of 5.43%. Employees must pay 8.65% in federal insurance contributions (FICA), which contribute to services such as social security, Medicare, and unemployment insurance.
To calculate the individual’s after-tax income, we must first calculate their total taxes by summing up their tax rates:
Total Taxes = 14.13% + 5.43% + 8.65% = 28.21%
$75,000 x 0.2821 = $21,157.50
Therefore, the individual’s total annual taxes are $21,157.50.
Now, we can calculate their after-tax income:
After-Tax Income = Gross Income – Taxes
After-Tax Income = $75,000 – $21,157.50 = $53,842.50
Therefore, the individual’s after-tax income is $53,842.50 per year.
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