Understanding After-Tax Income: A Comprehensive Guide

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 incomeDisposable IncomeDisposable Income is the money that is available from an individual’s salary after he/she pays local, state, and federal taxes. It is also available to spend.

Summary

• 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 taxSales Tax DecalculatorOur sales tax decalculator template can be used to calculate the pre-tax price in Excel when the tax rate and total price are known. The Excel decalculator makes this an easy task by using a simple formula. 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 incomeGross IncomeGross income refers to the total income earned by an individual on a paycheck before taxes and other deductions. It comprises all incomes. 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 expensesOperating ExpensesOperating expenses, operating expenditures, or "opex," refers to the expenses incurred regarding a business’s operational activities., 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.

Real-World Example

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.

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Distributable Net IncomeDistributable Net Income (DNI)Distributable Net Income (DNI) is a term that describes the portion of a trust’s income allotted to the beneficiaries.
• Earned IncomeEarned IncomeEarned Income is perceived as payment through an employer or one’s own business. It can include the following: wages, salaries, bonuses, tips
• Modified Adjusted Gross Income (MAGI)Modified Adjusted Gross Income (MAGI)The Modified Adjusted Gross Income (MAGI) is a measure used by the Internal Revenue Service (IRS) to determine if a taxpayer is eligible for
• Taxable IncomeTaxable IncomeTaxable income refers to any individual's or business’ compensation that is used to determine tax liability. The total income amount or gross income is used as the basis to calculate how much the individual or organization owes the government for the specific tax period.