After Tax Income

After tax income is defined as the sum of money an individual or company receives after all applicable taxes have been deducted. This includes federal, state, and withholding taxes. After tax income is sometimes referred to as disposable income, since it is the amount that a company or individual has left over to dispose of as desired. For this reason, after tax income is sometimes referred to as consumable income. Most investments are acquired with after tax income; the rate for dividends is determined based on this figure as well.

Calculating After Tax Income for Cash Flow Analysis


For most corporations, cash flow is based on after tax income. Typically companies make use of an after tax income calculator that figures in all applicable taxes; this allows a more accurate calculation of the company’s available funds and provides a basis for fiscally responsible investments and distributions. For businesses, after tax income is calculated by subtracting estimated tax liabilities (or, for past years, actual tax outlays) from the gross income figure. Deriving an after tax income estimate can be challenging, since the local, state, and federal tax codes are considered to be some of the most intricate and convoluted legal regulations.

After Tax Income vs EBITDA and EBITDAR


Many measures of corporate productivity are based on earnings before interest, taxes, depreciation and amortization (EBITDA) or earnings before interest, taxes, depreciation, amortization and rent (EBITDAR). EBITDA and EBITDAR are used primarily to determine the basic profitability of the company’s operations; however, they do not provide a clear picture of the overall financial situation. A company whose EBITDAR reflects a slight profit may actually be operating in the red after estimated taxes are deducted from its earnings. EBITDA and EBITDAR are useful benchmarks for comparing performance between one company and another, but do not offer an accurate measure of the company’s actual financial status.

Taxable and After Tax Contributions to Retirement Funds


For individuals, understanding after tax income is essential for retirement planning. Contributions can be made to retirement accounts on a pre-tax basis or after taxes have already been paid. Since retirement benefits typically cannot be taxed twice, after tax contributions are available in their entirety for use at the time of withdrawal; by contrast, withdrawals from retirement accounts composed of pre-tax contributions accrue tax and are treated as income when they are processed and received. For accounts containing both after-tax and pre-tax contributions, several options are available to participants. The after-tax portion can be taken as a lump sum distribution and retained by the individual immediately. It can alternatively be rolled into a qualifying traditional IRA, which would consist solely of after-tax contributions For some individuals, a process known as Roth IRA conversion is feasible; however, this is a complex undertaking and generally requires the advice and assistance of a qualified financial advisor.

Advantages of After Tax Income Distribution during Retirement


Some investment advisors recommend making all retirement contributions on a pre-tax basis; the theory is that income generally drops during the retirement years, and the resultant tax liability will fall into a lower tax bracket than is likely during the prime earning years. However, most experts note that tax rates tend to increase over time, and focus on the guaranteed level of income provided by after tax income distribution during retirement. Because taxes have already been paid, retirees will not experience unexpected deductions from their retirement income. Additionally, calculating the after tax income distribution amount is far simpler from an accounting standpoint. For individuals planning for retirement, this can be a significant advantage.
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