Pre-tax income is the income earned before taxes are deducted and can be important for shareholders, budgeting individuals, and those seeking financial aid. Understanding the difference between income before and after taxes can help with evaluating earnings and financial benefits. Retirement investments can also reduce tax payments.
Pre-tax income is simply the income a business or individual earns before taxes are deducted. This may also be called pre-tax income or gross income. There are several reasons why understanding pre-tax income can be important.
If you’re a shareholder in a company and want to calculate your earnings, you’ll be fine if you only look at pre-tax income. Earnings or stock payments are based on money earned after taxes, so you’ll need to assess how much money a business will make after you’ve paid your annual taxes. This can be a little tricky, since companies may list their profit as pre-tax income, rather than after-tax profit. Of course, you can ask the company for a statement of net income after taxes, which if you’re a shareholder, they should usually provide within a few weeks. For those who like to double check the numbers to make sure their earnings or payouts are evaluated correctly, it is necessary to always understand the nature of an earnings report and whether earnings are reported as before or after taxes.
For the individual, especially anyone budgeting, it’s wise to understand how businesses like rental agencies, lenders, and mortgage companies assess your income. Most assessments are based on income before taxes, but this is not a reflection of the money you actually bring home. When deciding whether you can afford a mortgage payment or a certain amount on a monthly credit card, you should always look at the money you actually make, not the money you make before taxes.
It can also be detrimental for people with lower incomes to have their income tested before taxes as the basis for qualifying for college funding, grants, free and reduced lunch programs, or government health care. Some people make money just above the poverty line, but pay enough taxes to actually be below the poverty line. It is valuable to understand the differences between income before and after taxes if you want to try to argue that you qualify for specific financial aid programs because of the amount of taxes you paid.
Taxes are not only based on how much money you earn, but also how many deductions you can take. A family with one child earning the same amount as a family with multiple children will pay higher taxes. With lower income, this could put you in a range where you qualify for certain financial benefits, if you are paying higher taxes.
In addition, you can consider pre-tax income as a means of evaluating whether you could save money in taxes by making retirement investments. If your income is in a higher range, you can reduce this by contributing to a 401k or IRA. These deductions are taken before the assessment of the pre-tax income analysis and can generally reduce your tax payments or place your income in a lower tax bracket.
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