What Is Net of Tax?
The term net of tax refers to the amount left after adjusting for the effectsof taxes. Net of tax can be a consideration in any situation where taxation is involved. Individuals and businesses often analyze before- and after-tax values to make investment and purchasing decisions. Net of tax is also an important part of expense analysis when reviewing annual tax filings and the net income of businesses.
Key Takeaways
- Net of tax is the amount left after adjusting for the effectsof taxes.
- Net of tax analysis can be important to consider in all situations where taxes may be involved.
- Some scenarios where the net of tax can be especially important include large asset purchases with sales tax, before and after-tax contributions, and income taxes for individuals or businesses.
Understanding Net of Tax
In the financial industry, gross and net are two key terms that refer to before and after paying certain expenses. In general, 'net of' refers to a value found after expenses have been accounted for. Therefore, the net of tax is simply the amount left after taxes have been subtracted.
There can be several scenarios where net of tax is important. Three of the most common are large asset purchases with sales tax, before and after-tax contributions, and an entity's total profit after tax.
Taxes can be a part of asset sales and purchases. Most large assets like cars, trucks, and motorcycles require a sales tax at the time of purchase. Sellers of these items may also be required to pay taxes on capital gains. Property has its own tax rules and is often not subject to sales tax. Many real estate owners can often qualify for tax breaks that help them reduce any capital gains taxes they might have to pay on real estate property sold.
The total taxes on a transaction are subtracted from the income or gains to calculate net of tax.
Calculating Net of Tax
For purchases, you'll need to consider the taxes and subtract them from the total amount you paid. For income, you subtract the amount you paid in taxes for the period from the amount you earned.
For example, if you earn $60,000 per year but paid $7,200 in taxes, you made $52,800 net of tax for the year.
Another example might be a company that sells one of its assets; it is usually not responsible for sales tax but may have to pay capital gains taxes. If a company bought a factory for $600,000 and sold it 10 years later for $1 million, it would have realized $400,000 in capital gains. At a capital gains tax rate of 15%, it would owe $60,000 in taxes on the sale. It would have profited $340,000 net of tax ($400,000 - $60,000) without considering other expenses for the transaction.
Net of Tax Strategies
Net of tax strategies can be important in the investment and financial planning world. Sinceinvestorsmust pay taxes on their capital gains, there are many strategies they can deploy to reduce or avoid the impact of taxes.
Tax Advantaged Investing
There are several investments and investment vehicles labeled as tax-advantaged. Municipal bonds are one of the most common tax-advantaged investments, with most of the asset class offering no federal tax on gains.
Investors can also choose to hold assets for more than one year to pay a reduced long-term capital gains tax versus the short-term capital gains rate, which adds the gains to the investor's income if they meet the income requirements. Moreover, some investors may invest to avoid alternative minimum taxes (AMT), which can apply to any investor but usually are a factor for taxpayers who itemize or those with higher net worth.
Retirement Accounts
Before- and after-tax investing or contributions can also be important for many investors. Any before-tax contribution lowers the value of taxable income. Any after-tax contribution is considered to be net of tax with taxes already subtracted.
Investing in a 401(k) plan or individual retirement account (IRA) is often done with before- or after-tax contributions. Many investors pay into 401(k)s and traditional IRAs with pre-tax dollars, which helps to lower their taxable income. Effectively, the investor will be taxed at the time of withdrawal instead. Alternatively, Roth IRAs are funded with after-tax dollars. Thus, Roth IRAs are not taxed at the time of withdrawal, because the tax was paid before the Roth IRA was funded.
Roth IRA accounts can also provide unique opportunities to invest without taxation. For instance, if you had a Roth IRA account with $100,000 in stocks and $100,000 in bonds, it's possible to sell stocks and bonds within the account without ever paying taxes on gains when you make a withdrawal as long as you meet the criteria for a qualified distribution.
Employer Benefits
Some companies may also offer tax-advantaged benefits like pre-tax deductions for purchasing transportation cards as part of their employee benefit plans. Any pre-tax deductions for regular expenses can be helpful because they lower the taxable amount and increase net of tax values.
Net of Tax and Income
Analyzing gross versus net income for an annual tax year is often an important scenario involving net of tax consideration. Overall, individuals and businesses can take expense deductions that reduce their taxable income. Entities may also take credits that reduce any tax they owe. Both individuals and businesses make regular tax payments throughout the year, which should also be monitored to ensure optimal net of tax earnings.
The IRS taxes individuals at the following annual income tax rates for the 2023 tax year (the return that is filed in 2024):
| 2023 Tax Rates | ||||
|---|---|---|---|---|
| Single | Married Filing Jointly | Married Filing Separately | Head of Household | |
| 10% | Less than $11,000 | Less than $22,000 | Less than $11,000 | Less than $15,700 |
| 12% | $11,001 | $22,001 | $11,001 | $15,701 |
| 22% | $44,726 | $89,451 | $44,726 | $59,851 |
| 24% | $95,376 | $190,751 | $95,376 | $95,351 |
| 32% | $182,101 | $364,201 | $182,101 | $182,101 |
| 35% | $231,251 | $462,501 | $231,251 | $231,251 |
| 37% | $578,125 or more | $693,750 or more | $346,875 or more | $578,100 or more |
The IRS taxes individuals at the following annual income tax rates for the 2024 tax year (the return that will be filed in 2025):
| 2024 Tax Rates | ||||
|---|---|---|---|---|
| Single | Married Filing Jointly | Married Filing Separately | Head of Household | |
| 10% | Less than $11,600 | Less than $23,200 | Less than $11,600 | Less than $16,550 |
| 12% | $11,600 | $23,200 | $11,600 | $16,550 |
| 22% | $47,150 | $94,300 | $47,150 | $63,100 |
| 24% | $100,525 | $201,050 | $100,525 | $100,500 |
| 32% | $191,950 | $383,900 | $191,950 | $191,950 |
| 35% | $243,725 | $487,450 | $243,725 | $243,700 |
| 37% | $609,350 or more | $731,200 or more | $365,600 or more | $609,350 or more |
The annual tax rate generally assessed on corporations is 21%.
At the end of the tax year, when entities file their tax returns, certain deductions or credits can help to reduce the taxes they owe. Arriving at the total net of tax figure requires subtracting all the income taxes paid throughout the year from the gross income received.
If you receive a refund at tax time, this can be a type of reimbursem*nt for taxes already withheld. Your refund then offsets your net of tax income. In general, individuals and businesses usually seek to take advantage of as many tax deductions and credits as possible to reduce the total taxes paid and increase their annual net of tax value.
Is Net of Tax Before or After?
Net of tax is what remains after all taxes have been subtracted from your gross pay or income.
Does Net Means Including or Excluding?
"Net" refers to the amount left over after reducing (including) a specific amount in the calculation. Net of taxes means income after taxes.
How Do I Calculate Net of Tax?
The easiest way is to subtract what you've paid in taxes from what you've earned.
The Bottom Line
Net of taxes is the amount of money you have left after subtracting taxes. It's generally used by businesses or investors who are measuring available capital to make decisions that affect their company or investments. Individuals can use it to learn how much they've earned or spent after accounting for taxes paid.
