What is disposable income? It is income taken out of an individual’s paycheck and then spent according to a pre-determined plan. For example, let’s say that Joe has some extra money that he wants to use for some things. He tells his boss that he wants to buy a new stereo system for himself or his wife. The next week, his paycheck arrives and Joe is stunned to see his paycheck had gone the way of the dinosaur! What happened?
Basically, disposable income is basically total consumer spending minus personal property taxes and local taxes. In most national accounts calculations, disposable income minus local taxes equal disposable income. With all the talk about reducing the national debt and balancing the budget, it may be easier to understand why local and state governments encourage people to spend less by allowing consumers to deduct a portion of their income tax from their paycheck and use that money to purchase goods and services in the form of disposable income such as leisure, travel and entertainment. This type of spending is called expenditures and is subject to taxation.
You see, the whole concept of “disposable income” actually depends on whether you have a job or not. If you have a job, you are only taxed on your net pay and you don’t have to worry about the taxes on your disposable income. However, if you don’t have a job, you are required to pay taxes on your disposable income depending on what you do with it and on what you contribute to your Social Security and Medicare programs.
Simply stated, it is all of the income that you make after you subtract your expenses from your income. In simple terms, disposable income is basically all of the income that you make after you subtract your expenses from your income. In most national accounts systems, personal disposable income less personal current income equals disposable income.
One way to decrease your disposable income, while keeping your income the same, is to reduce your annual tax liability. There are several ways to do this. Most national accounts systems calculate a locality dependent tax liability using various local taxes. These taxes may be in the form of sales tax, property tax, or both.
There are many ways to reduce your disposable income through reducing your taxable income through mandatory deductions and excessive contributions to retirement accounts and other tax sheltering programs. All forms of mandatory deductions can affect your disposable income. For example, you may be able to deduct the cost of health insurance on your personal residence when you are self employed. You can also deduct expenses for traveling to your job. Both of these types of deduction may be subject to the regular tax laws and codes.
There are several ways to increase your disposable income by increasing your tax liability. For example, if you are a non-residential U.S. resident who works outside of the U.S., but have a U.S. tax residency, some of your income could be subjected to U.S. taxes. Many U.S. residents choose to exclude their income earned abroad from their income tax returns. This allows them to lower their overall U.S. taxable income and offset some of the U.S. tax burden on foreign-sourced profits. While this strategy can lower your overseas taxable income, you are still not getting the benefit of a higher standard rate of taxation that would apply to your U.S. dependent children or adult dependents living in the U.S.
Some people choose to increase their disposable income by earning more foreign-based earnings. Such individuals may be subject to U.S. taxes on such earnings if they have been ordered to pay U.S. taxes on such earnings abroad. For example, if a foreign employer does not permit their employee to contribute towards his or her retirement savings plan, the employee may lose the benefits available under the plan because the employer will take those monies from the employee’s retirement account if the employee has not made adequate contributions.
Some of your disposable income could be derived from property you own. If you have paid property taxes for several years, you may be entitled to a tax break. Many cities and counties have reciprocal agreements with other municipalities to allow property owners to deduct a portion of their property taxes off of their annual income taxes. You can check with your local tax collector to find out what comparable cities and counties offer.
You may also be able to deduct a portion of your disposable income on your U.S. tax return for purposes of local taxes. This means that you will be taxed on any interest or dividends you receive, but the money deducted should be sent to your U.S. bank account so that it can be readily withdrawn when needed. If the amount of money you deduct is less than the total of your annual income, the tax collector will notify you before your next tax season comes around. You should not wait until the following year’s tax season, to make the proper payments.
What is Disposable Income can be a very important part of a well-managed portfolio. It is not appropriate for all types of investments, but there are some excellent alternatives to savings accounts and stocks. Disposable funds are useful for funding short-term cash needs, investing in the stock market, and making investments in real estate. If you are currently collecting a fixed income and are concerned about the amount of available disposable income, consider investing in a PCE, a qualified retirement account, or an annuity.