Pre-tax income is simply the income a business or individual makes before taxes are deducted. This can 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 profits, you’ll be out if you only factor in income before tax. Profits or stock payments are based on after-tax money earned, so you’ll need to assess how much money a company will make after paying annual taxes. This can be a bit tricky, since companies may list their profits as pre-tax income, instead of after-tax profits. You can of course ask the company for a statement of net income after tax, which if you’re a shareholder, they usually have to provide you within a few weeks. For those who like to double-check numbers to make sure their profits or payouts are valued correctly,
For the individual, especially someone who’s budgeting, it’s wise to understand how businesses like rental agencies, lenders, and mortgage companies evaluate your income. Most assessments are based on pre-tax income, but this doesn’t reflect the money you actually take home. When deciding whether you can afford to pay a mortgage payment or a certain amount on a monthly credit card, you should always look at the money you actually make and not the money you make before tax.
It can also be harmful for lower earners to have their pre-tax income analyzed as a basis for qualifying for college funding, grants, free or reduced lunch programs, or government health care. Some people earn just above the poverty line, but pay enough taxes to actually be below the poverty line. It’s helpful to understand the differences between pre-tax and after-tax income if you want to argue that you are eligible for specific financial aid programs because of the amount of tax you pay.
Taxes aren’t just based on how much money you make, but also on how many deductions you can take. A family with one child earning the same amount as a family with more children will pay higher taxes. With a lower income, this could actually put you in a bracket where you’re eligible for certain financial benefits, if you’re paying higher taxes.
In addition, you may consider pre-tax income as a means of assessing whether you can save on taxes by making investments for retirement. If your income is on the higher end, you may be able to reduce it by contributing to a 401k or IRA account. These deductions are taken before the Pre-Tax Income Analysis assessment and may collectively reduce your tax payments or place your income in a lower tax bracket.