Taxes What Is Net of Tax? By Dan Marticio Dan Marticio Dan Marticio is a trusted personal finance writer whose articles and reviews about loans, investing, and small business have appeared on top financial sites including The Balance, LendingTree, ValuePenguin, Fundera, and NerdWallet. learn about our editorial policies Updated on January 9, 2023 Reviewed by Eric Estevez Fact checked by J.R. Duren In This Article View All In This Article How Net of Tax Works Example of Net of Tax Net of Tax and Retirement Frequently Asked Questions (FAQs) Photo: Jose Luis Pelaez Inc / Getty Images Definition Net of tax refers to the amount of wages you have left after you subtract taxes. Key Takeaways “Net of tax” is a term that refers to the amount of income you have after subtracting taxes.Net of tax is affected by tax rates, which are determined by several factors, such as income thresholds and filing status.Tax credits and deductions can reduce your tax liability, thus resulting in a more favorable net of tax.Since income accumulated in retirement accounts or pensions is subject to taxes, individuals should understand how their plans work to determine their net of tax income during retirement. How Net of Tax Works The term “net of tax” is the amount of money you have after you account for your tax bill. Since taxes are levied against individuals and businesses alike, the concept of “net of tax” applies to both types of taxpayers. When your income passes a certain threshold, your income is subject to taxes. Therefore, an individual or corporation does not receive their full wages because they must subtract the cost of taxes. The state or federal government levies taxes to fund various services, such as transportation, or for social benefits, like Social Security, Medicare, Medicaid, and more. The amount of your wages that are left over after the taxes are applied is known as “net of tax.” Note The federal government imposes a direct income tax on various types of income, including income generated from investments, such as interest and dividends from stocks and bonds. Recurring types of income, like royalties and rent collected from real estate properties, are also subject to taxes. In the United States, your net of tax is affected by how much you earn because different tax rates apply to different income brackets. This is known as a progressive income tax—rates increase when income hits a certain threshold. Here's a hypothetical example of a progressive tax system: 10% tax on income up to $10,00012% tax on income from $10,001 to $30,00022% tax on income from $30,001 to $80,00024% tax on income from $80,001 to $160,000 Note Your filing status will also affect your net of tax. The tax implications are different for married couples filing joint returns or for heads of households than they are for single filers. For example, the IRS typically doubles the size of the tax brackets for taxpayers who are married and filing jointly compared to those who file as single. Individuals and business entities can increase their net of tax in part by reducing the taxes they owe through deductions and credits. Tax deductions and credits are also available to individuals, allowing you to keep more of what you earn. For example, individuals can deduct several types of costs, including medical expenses and interest on student loans. Individuals can also improve their net of tax through various tax credits, such as: Earned Income Tax Credit: This tax credit provides a tax break to workers and families with low- to moderate-incomes.Child and dependent care credit: Available to parents and guardians, this tax credit is useful for mitigating the costs of babysitting and daycare. The credit can also extend to caring for an individual who is physically or mentally unable to care for themselves.Lifetime learning credit: If you’re seeking post-secondary education, this tax credit can help offset some of the costs of obtaining a degree. Several types of business expenses are tax-deductible like rent, interest on commercial loans, employee salaries, business insurance, employee benefits, and more. Example of Net of Tax Consider this simplified, hypothetical example of net of tax. You earned $50,000 this year. However, you paid $7,500 in income taxes. To calculate your, you would subtract $7,500 from $50,000. $50,000 - $7,500 = $42,500 So, in this scenario, you would have an income net of tax of $42,500. Net of Tax and Retirement Your income can still be subject to taxation when you retire. Like other forms of income, your retirement savings is also subject to taxation. Note Keep in mind how net of tax will affect your finances in retirement. Proper planning can help you understand your tax obligations so you can maximize your income in your golden years. For traditional 401(k) plans, income taxes are deferred until you withdraw from your account. Any pensions you receive from your employer are taxed, as well. You will owe federal income tax on each pension annuity and periodic pension payments. If you opt for a lump-sum payout, you are required to pay the taxes on the entire amount when filing your tax returns. Frequently Asked Questions (FAQs) How do you find the net of tax? The easiest way to calculate net of tax is to subtract what you've paid in taxes from what you earn. If you paid $10,000 in taxes during the year and earned $60,000, your net of tax would be $50,000. Does net mean including tax? In the context of net of tax, net means what's left after taxes. Gross, on the other hand, means what you earned before taking out taxes and other deductions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Tax Policy Center. “How Does the Federal Government Spend Its Money?” IRS. "Earned Income Tax Credit (EITC)." IRS. "Topic No. 602 Child and Dependent Care Credit." IRS. "Lifetime Learning Credit." The Hartford. "Business Expense Deductions That Can Lower Your Tax Bill." FINRA. “Taxation of Retirement Income.”