What Is After-Tax Income?

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DEFINITION
After-tax income is the amount of money a taxpayer has after paying taxes. This is typically calculated on an annual basis, but sometimes on a paycheck-by-paycheck basis.

After-tax income is the amount of money a taxpayer has after paying taxes. This is typically calculated on an annual basis, but sometimes on a paycheck-by-paycheck basis.

Learn what after-tax income is, how it is calculated, and why it is important.

Definition and Example of After-Tax Income

After-tax income is the amount of money you have after paying taxes. This is how much money you have to spend. After-tax income doesn’t just affect you personally. It also impacts the whole economy.

  • Alternate definition: The term “after-tax income” is also used in the context of welfare benefit funds. In this sense, it means the gross income of the fund minus the fund’s deductions and any federal taxes for that year.
  • Alternate name: Disposable personal income

Most people know how much they earn, whether on a weekly, monthly, or yearly basis. However, knowing your after-tax income tells you how much of that money you actually have to spend.

For example, 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.

How After-Tax Income Works

Calculating after-tax income is simple. You subtract your total tax bill 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 since it represents the amount of money you have to pay your bills and other mandatory expenses. 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.

Consumer spending per household usually makes up around 60% of a country’s Gross Domestic Product (GDP). It also generates a significant portion of job growth.

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.

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.

Other deductions from your paycheck might include money put in an FSA toward health insurance, or into retirement accounts. The amount of money you get after both taxes and deductions is often called your “take-home pay” or “net income.”

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).

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 any is taken out for taxes. Although two individuals may have the same before-tax income, they may have very different after-tax income. This is due to factors such as filing status, deductions, and credits.

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 wage earner and a self-employed individual may have the same before-tax income. However, due to the different way they are taxed, their after-tax incomes could be quite different.

For example, the 2017 Tax Cuts and Jobs Act created a 20% deduction for pass-through businesses, known as the Qualified Business Income Deduction. This means that a sole proprietor would pay tax on 20% less of their income than a wage earner who earns the same amount. This can add up to significantly lower taxes, which means a much higher after-tax income.

Key Takeaways

  • After-tax income is the amount of money you have after paying your personal taxes.
  • After-tax income can be calculated on an annual basis or on other bases, such as paycheck by paycheck.
  • Taxpayers with the same before-tax income amount often have different after-tax income depending on their personal tax burden, credits, and deductions.

Article Sources

  1. Bureau of Economic Analysis U.S. Department of Commerce. "Disposable Personal Income." Accessed Jan. 20, 2022.

  2. Cornell Law School Legal Information Institute. "26 U.S. Code § 419 - Treatment of Funded Welfare Benefit Plans." Accessed Jan. 20, 2022.

  3. U.S. Bureau of Labor Statistics. "Consumer Spending: An Engine for U.S. Job Growth," Pages 1-2. Accessed Jan. 20, 2022.

  4. Congressional Research Service. "Changes in After-Tax Income From the Tax Provisions in the 'Build Back Better Act' — Distributional Analysis," Page 2. Accessed Jan. 20, 2022.

  5. City of Tacoma Washington. "Are You Ready Yo Maximize Your Healthcare Dollars?" Page 2. Accessed Jan. 20, 2022.

  6. Consumer Financial Protection Bureau. "How To Read a Pay Stub." Accessed Jan. 20, 2022.

  7. PubMed.gov. "After-tax Money Income Estimates of Households: 1984." Accessed Jan. 20, 2022.

  8. Internal Revenue Service. "Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs." Accessed Jan. 20, 2022.