Before-tax income is quite simply the income a business or private individual makes prior to taxes being deducted. This may also be called pre-tax income or gross income. There are several reasons why understanding the before-tax income can be important.
If you’re a shareholder in a company and want to figure your profits, you’ll be off if you only consider the before-tax income. Profits or stock payouts are based on the money made after taxes, so you’ll need to evaluate just how much money a company will make after they have paid their yearly taxes. This can be a little difficult, since companies may list their profits as before-tax income, instead of profits after taxes. You can of course ask the company for a statement of net income after taxes, which if you’re a shareholder, they usually must provide to you within a few weeks. For those who like to double check the numbers to be certain their profits or payouts are assessed correctly, you need to always understand the nature of a report on profits, and whether profit is listed as before-tax or after.
For the private individual, especially for anyone who is budgeting, it’s wise to understand how companies like rental agencies, lenders, and mortgage companies assess your income. Most assessments are based on before-tax income, but this is not a reflection of what money you actually take home. When you’re deciding whether you can afford to pay a mortgage payment or a certain amount on a monthly credit card, you should always evaluate the money you actually make, and not the money you make before taxes.
It may also be detrimental to people who make smaller incomes to have their before-tax income analyzed as a basis for qualification for college funding, grants, free or reduced lunch programs, or government health care. Some people make money just above the poverty line, but pay enough in taxes to actually be below the poverty line. It’s valuable to understand the differences between income before and after taxes if you’d like to attempt to argue that you qualify for specific financial aid programs due to the amount of taxes you paid.
Taxes are not only based on how much money you make but also the number of deductions you can take. A family with one child that makes the same amount as a family with several children will pay higher taxes. With lower income, this might indeed put you into a bracket where you qualify for certain financial benefits, if you’re paying higher taxes.
Additionally, you might look at the before tax income as a means of gauging whether you could save money on taxes by making retirement investments. If your income is in a higher bracket, you may be able to reduce this by contributing to a 401k or IRA account. These deductions are taken out prior to evaluation of before tax income analysis and may overall reduce your tax payments or put your income in a lower tax bracket.
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