What is After-Tax deduction?
After-tax deduction is the amount that is automatically deducted from employees’ post-tax income. This is the amount that remains after payroll taxes have been deducted and pre-tax deductions from pay checks have been made.
The digitised after-tax revenues for firms are relatively the same as for individuals, but companies begin by identifying total revenues instead of evaluating gross income.
Examples of After-Tax Deductions:
After-tax deductions can include a variety of items such as:
- Wage garnishments
- Union dues
- Certain insurance premiums (e.g., life insurance)
- Charitable contributions
How to Calculate After-Tax Deductions?
Calculating after-tax deductions involves several steps:
- Determine Gross Income: Start with the total earnings before any deductions.
- Subtract Pre-Tax Deductions: These include contributions to retirement plans (like a 401(k)), health insurance premiums, and other eligible expenses.
- Calculate Taxable Income: This is the income on which taxes will be calculated.
- Calculate Taxes Owed: Use the taxable income to determine federal, state, and local taxes.
- Net Income After Taxes: Subtract the calculated taxes from the taxable income.
- Subtract After-Tax Deductions: Identify and subtract any after-tax deductions.
Detailed Calculation Example
Let's consider an example to illustrate the process:
Abi Sample's Calculation
- Gross Income: $30,000
- Pre-Tax Deductions: $10,000
- Taxable Income=$30,000−$10,000=$20,000
- Taxes Owed: Assuming a federal tax rate of 15%
Federal Taxes=$20,000×0.15=$3,000
Income After Federal Tax=$30,000−$3,000=$27,000
- State and Local Taxes: Abi pays $1,000 in state taxes and $500 in municipal income taxes:
Income After State and Local Taxes=$27,000−($1,000+$500)=$25,500
- After-Tax Deductions: Let's assume Abi has $200 in union dues and $100 in other after-tax deductions:
Final Net Income=$25,500−($200+$100)=$25,200
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