What is Post-Tax Income?

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Post-tax income is income that has been reduced for all taxes including federal income taxes and state and local taxes. Post-tax income is available for spending without the burden of additional taxes.

The US tax system is notoriously complex, but it pays to be familiar with straightforward ways to save on taxes.

You can maximize your post-tax income without the need to earn more in total income by taking advantage of tax breaks.

The Effect of Taxes

In the United States if you earn taxable income, you are responsible for paying your share of taxes on that income.

To calculate income taxes, start with adjusted gross income (AGI) and reduce it by any tax deductions or tax credits, to arrive at taxable income.

Income tax rates are applied to the taxable income, and post-tax income is what is left over after income taxes and other taxes have been accounted for.

An effective tax rate is a person’s tax rate that takes all taxes into consideration.

If someone earned $100,000 and they paid $40,000 in taxes, their effective tax rate is 40 percent ($100,000 of income multiplied by 40 percent equals the $40,000 in taxes paid).

In this example, the person’s post-tax income would be $60,000, calculated by subtracting the $40,000 in taxes from the income of $100,000.

Post-Tax Income vs. Pre-Tax Income

Taxes can take a big chunk out of a person’s earnings. However, savvy taxpayers who are aware of the tax rules and take advantage of tax breaks can maximize their post-tax income.

In certain situations, the IRS lets you use pre-tax income to pay for expenses or save for retirement. Using pre-tax income allows you to skip paying most (but not all) taxes, which can result in significant savings.

Although there are limited uses for pre-tax income, a few programs do exist.

The most common programs for pre-tax income are health insurance plans and retirement savings accounts (for example, IRA and 401(k) accounts).

Some employers offer health savings accounts, which let you use pre-tax income to pay for medical expenses. Many cities have programs called commuter benefits that encourage use of public transportation by letting people buy bus or train tickets with pre-tax dollars.

The table below summarizes some of these popular pre-tax income plans; however, this is by no means an exhaustive list.

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