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Understanding your after-tax income is crucial for effective financial planning, budgeting, and investing. It determines your ability to cover everyday expenses, hit your savings goals, and invest wisely.

But what is after-tax income? Let’s take a look at exactly what after-tax income is, how to calculate it, and why it’s important in your financial life.

After-tax income explained

After-tax income is the net amount of income you bring home after all deductions for taxes are made. These deductions include federal income tax, state and local taxes, Social Security, and Medicare deductions.¹ Essentially, post-tax income is the money available to you for spending, saving, or investing.

Calculating after-tax income is quite simple: you just need to subtract all the taxes you pay from your gross income, which is the total income you earn before any deductions or taxes are applied. Depending on your employer, you may also have other deductions such as contributions to retirement savings plans like a 401(k) or premiums for employer-sponsored health insurance.²

To get a deeper dive into tax-related terms, take a look at Chime’s tax terms glossary​​.

The importance of understanding after-tax income

Knowing your after-tax income offers several benefits that you don’t get from just knowing your gross income:

  1. Accurate budgeting: Understanding your after-tax income allows you to create a realistic budget that reflects the money you actually have available to spend each month. This helps you to allocate your funds to essentials like housing, food, utilities, and transportation, while also setting aside money for savings and discretionary spending.
  2. Financial goal setting: Whether you’re saving for a down payment on a house, planning a vacation, building an emergency fund, or saving for retirement, knowing your “real” income helps you determine how much you can afford to set aside each month towards these goals.
  3. Debt management: If you need to pay off debts like credit card balances, student loans, or a mortgage, your post-tax income determines how much you can afford to pay above the minimum payment amount to reduce your debt faster.
  4. Peace of mind: Knowing your after-tax income reduces your financial stress by eliminating uncertainties about your financial situation, which allows you to plan confidently for the future.

Types of after-tax income

While the idea of income after tax may seem simple at first, the term can be used in different ways. The differences generally come down to which deductions are included in the calculation of after-tax income.

  1. On a paycheck basis: When you receive your paycheck, it reflects your gross income earned from employment minus a series of deductions. These deductions include federal income taxes, state and local taxes, and other payroll deductions like contributions to a retirement savings plans (like a 401(k) or IRA), health insurance premiums, and possibly union dues or other work-related expenses. The resulting figure is the amount you actually take home, and it’s what many people consider their “real” income.
  2. On a federal income tax return basis: This perspective takes a slightly broader view than the paycheck basis, focusing on the income that remains after only federal income taxes have been deducted. This method doesn’t account for state and local taxes, which can vary significantly depending on your location, but it does provide insight into how federal tax policies and your tax filing status (single, married filing jointly, etc.) affect your income.
  3. On a holistic basis: This is the most comprehensive perspective on after-tax income, which considers not only wages but also all other sources of income, like investments, rental income, business income, and even less common sources like royalties or income from trusts.³ It also accounts for all deductions, not just those from payroll or federal taxes but also state and local taxes, personal exemptions, and deductions for mortgage interest, medical expenses, and more. The holistic view provides a complete picture of an individual’s financial health and is the most helpful for long-term financial planning.
Get your federal tax refund up to five days early* when you direct deposit with Chime and file directly with the IRS.

How to calculate after-tax income

The formula for calculating your after-tax income is simple: start with your gross income, then subtract all the taxes you pay. These taxes include federal income tax, state income tax, Social Security, Medicare taxes, and any other local taxes.

After-tax income = Gross income – Total taxes

However, the calculation goes beyond merely subtracting taxes from your gross income, since various factors influence your monthly income after taxes. These factors include your filing status (single, married filing jointly, etc.), the number of dependents you have, and any deductions or credits you’re eligible for, like educational expenses, retirement contributions, or charitable donations.

Alternatively, if you know your effective tax rate (the overall percentage of tax you pay on your total income), not just your marginal tax rate (the tax rate applied to your last dollar of income), you can calculate your after-tax income by multiplying your gross income by your effective tax rate.

An example of after-tax income

Suppose you have an annual income of $60,000 and you pay $15,000 in taxes for the year. Your effective tax rate would be 25%, and your after-tax income would be $45,000. This represents what you have available to cover essential costs like food, housing, and utilities, as well as for spending on non-essential items like clothes, vacations, and anything else.

What is the difference between after-tax and before-tax income?

Before-tax income, or gross income, is the total earnings you receive from all sources before any taxes are deducted. It includes wages, salaries, bonuses, and any other income you may have, and is used by tax authorities to determine how much tax you owe.

After-tax income, on the other hand, is what remains after all taxes, including federal, state, and local taxes, have been subtracted from your before-tax income.

Knowing your income after taxes is key if you want to understand your true purchasing power.

After-tax income is your friend

Understanding your after-tax income isn’t just about numbers; it’s about empowerment and making informed decisions that impact your financial health and future. By understanding the concept of after-tax income and learning how to calculate yours, you’re arming yourself with the knowledge you need to be financially strong today and into the future.

To dive even deeper into the intricacies of after-tax income, continue reading about gross pay vs. net pay.

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* Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. Federal tax payment files received from the IRS may be received up to 5 days early (based on data from the 2020 tax filing season). Chime makes no guarantee over when files are sent by the IRS and funds can be made available.

¹ Information from Investopedia's The Basics on Payroll Tax as of March 11, 2024:

² Information from Investopedia's The Basics on Payroll Tax as of March 11, 2024:

³ Information from Internal Revenue Service's 401(k) Plan Overview as of March 11, 2024:

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