When you talk about and compare annual salaries among friends, you might throw around numbers based on your gross income, or income before taxes. But not all of that money is yours to spend — Uncle Sam gets a piece of it. The portion left over after accounting for taxes is your spendable, or disposable, income. Before you stick a shopping spree or extra vacation in your budget, calculate your spendable income to determine the actual amount that’s yours.
Divide the total taxes you paid last year — including federal, state, local, Social Security and Medicare taxes — by the total income you earned to determine your average tax rate. For example, assume you earned $75,000 and paid $13,500 in taxes. Divide $13,500 by $75,000 to get 0.18, or an 18 percent tax rate.
Multiply your average tax rate by the total gross income you expect to earn this year to determine the total income taxes you expect to pay. In this example, assume you expect to earn $80,000. Multiply 0.18 by $80,000 to get $14,400 in income taxes.
Subtract the amount of income taxes you expect to pay this year from your expected income to calculate your spendable income. Concluding the example, subtract $14,400 from $80,000 to get $65,600 in spendable income.
- If your income changes significantly between last year and this year, your average tax rate might also change, which will affect your spendable income.
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