## Formula to Calculate Disposable Income

Disposable Income is the amount of money available after accounting for income taxes, either to spend or save the same. Disposable Income formula = PI – PIT, where PI is personal income and PIT = personal income tax.

The disposable income equation is quite simple to use and calculate. First, we need to find out the gross income of the individual before any expenses and then deduct the same gross income by the applicable tax rate. As the taxes cannot be avoided henceforth it’s a must to deduct the income taxes to arrive at disposable income figures. Disposable income can be used for paying expenses, bills, and leisure activities

**Disposable Income Formula = Personal Income – Personal Income Taxes**

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For eg:

Source: Disposable Income Formula (wallstreetmojo.com)

### Disposable Income Calculations

#### Example #1

**Wilson and Wilson’s family earn around monthly $60,000 and they pay $5,000 as monthly federal tax. Based on the above information you are required to calculate the Personal Disposable Income for the entire year.**

**Solution**

Use below given data for the calculation of disposable income

- Gross Salary: $60,000
- Federal Taxes: $5,000

First, we need to calculate the yearly gross salary and yearly federal taxes.

Therefore, the calculation of disposable income will be as follows,

= 720,000 – 60,000

**Disposable Income will be –**

**Disposable Income= 660,000**

Hence, the disposable income of Wilson and the Wilson family is $660,000.

#### Example #2

**Anjali is working full time employ with Morgan Chase Inc as a senior analyst in a supporting role. She recently learned about disposable income concepts in a seminar and she was curious to calculate her personal disposable income being from an engineer background. She opened up her salary slip and below are the details:**

She is paying 35% federal taxes after eligible deductions. Further, she is eligible for 3 times a year shift allowance and provident fund along with professional taxes are deducted on a monthly basis. You are required to calculate the yearly disposable income for Anjali.

**Solution**

In this example, we will first calculate the gross income that is available to her after deducting provident fund and professional taxes and then finally deducting federal income taxesFederal Income TaxesFederal income tax is the tax system in the United States and is levied and governed by Internal Revenue Services (IRS). It helps determine the tax charged on the income earned by individuals, corporations, and various other legal entities.read more.

Now Gross salary before fed taxes will be 106900 less 10800 which equals to 96,100.

She is in the bracket of 35% and the income tax on the same will be 96,100 x 35% which is 33,635.

Therefore, the calculation of disposable income will be as follows,

= 96,100 – 33,635

**Personal Disposable Income will be –**

**Disposable Income = 62,465**

** **Hence, the disposable income for Anjali would be 62,465.

#### Example #3

**Mr. X was working in an MNC where he was earning a gross salary of 20,00,000 per annum and he was in a tax bracket for 30% on income above 10,00,000 and 10% on income below 10,00,000. He was recently asked to move to the USA as part of the job and there he was eligible for $27,000 per annum basis. He was supposed to return in a period of 5 years back to his home country. **

**However, he was given a decision of whether to opt for this opportunity or not. He learned that he would be paying taxes in the USA flat 27% without any deductions. The exchange rate prevailing was 1USD = 70 units of home currency. You are required to assess whether he should opt for the US to opt or let it go on the basis of the disposable income concept.**

**Solution**

In this example, we need to compare the disposable income of home country vs USA.

- Gross salary per annum of home country: 2000000.00
- Income Tax Rate up to 10 lacs: 10%
- Income Tax Rate above 10 lacs:30%
- Gross salary per annum of USA: 27000.00
- Federal Income Tax Rate: 27%

Calculation of Disposable Income of Home Country

=2000000.00-400000.00

**Disposable Income of Home Country will be –**

=1600000.00

Calculation of Personal Disposable Income in the USA

=27000.00-7290.00

**Disposable Income in USA will be –**

=19710.00

Therefore, using the exchange rate given in problem we can use 70 as rate and hence the disposable amount in-home units will be 19,710 x 70 will be 13,79,700.

Since this is less than its current home country’s disposable income, he can consider not opting for the USA job.

### Relevance and Uses

Disposable income can be used in deriving several economic indicatorsEconomic IndicatorsSome economic indicators are GDP, Exchange Rate Stability, Risk Premiums, Crude Oil Prices etc. read more and statistical measures. For example, economists can use disposable income as a beginning point to calculate metrics like personal savings rates, marginal propensity to save (MPS), discretionary income, and MPC formulaMPC FormulaMarginal Propensity to Consume refers to the increase in consumption owing to the increment in disposable income. It is determined as the ratio of change in consumption (ΔC) to change in disposable income (ΔI). read more. Disposable income as stated in the income left after taxes.

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