What Is After-Tax Income?

After-tax income is the net income after the deduction of all federal, state, and withholding taxes. After-tax income, also called income after taxes, represents the amount of disposable income that a consumer or firm has available to spend.

Understanding After-Tax Income

Most individual tax filers use some version of the IRS Form 1040 to calculate their taxable income, income tax due, and after-tax income. To calculate after-tax income, the deductions are subtracted from gross income. The difference is the taxable income, on which income taxes are due. After-tax income is the difference between gross income and the income tax due. 

Consider the following example: Abi Sample earns $30,000 and claims $10,000 in deductions, resulting in a taxable income of $20,000. Their federal income tax rate is 15%, making the income tax due $3,000. The after-tax income is $27,000, or the difference between gross earnings and income tax ($30,000 – $3,000 = $27,000).

Individuals can also account for state and local taxes when calculating after-tax income. When doing this, sales tax and property taxes are also excluded from gross income. Continuing with the above example, Abi Sample pays $1,000 in state income tax and $500 in municipal income tax resulting in an after-tax income of $25,500 ($27,000 – $1500 = $25,500).

Calculating After-Tax Income for Businesses

Computing after-tax income for businesses is relatively the same as for individuals. However, instead of determining gross income, enterprises begin by defining total revenues. Business expenses, as recorded on the income statement, are subtracted from total revenues producing the firm’s income. Finally, any other relevant deductions are subtracted to arrive at taxable income.

The difference between the total revenues and the business expenses and deductions is the taxable income, on which taxes will be due. The difference between the business’s income and the income tax due is the after-tax income.

After-Tax and Pretax Retirement Contributions

The terms after-tax and pretax income often refer to retirement contributions or other benefits. For example, if someone makes pretax contributions to a retirement account, those contributions are subtracted from their gross pay. After deductions are made to the gross salary amount, the employer will calculate payroll taxes.

Medicare contributions and Social Security payments are calculated on the difference after these deductions are taken from the gross salary amount. However, if the employee makes after-tax contributions to a retirement account, the employer applies taxes to the employee’s gross pay and then subtracts the retirement contributions from that amount.

What Is an 80-10-10 Mortgage?

An 80-10-10 mortgage is a loan where first and second mortgages are obtained simultaneously. The first mortgage lien is taken with an 80% loan-to-value (LTV) ratio, meaning that it is 80% of the home’s cost; the second mortgage lien has a 10% LTV ratio, and the borrower makes a 10% down payment.

This arrangement can be contrasted with the traditional single mortgage with a down payment amount of 20%.

The 80-10-10 mortgage is a type of piggyback mortgage.

Understanding an 80-10-10 Mortgage

​​​​​​​When a prospective homeowner buys a home with less than the standard 20% down payment, they are required to pay private mortgage insurance (PMI). PMI is insurance that protects the financial institution lending the money against the risk of the borrower defaulting on a loan. An 80-10-10 mortgage is frequently used by borrowers to avoid paying PMI, which would make a homeowner’s monthly payment higher.

In general, 80-10-10 mortgages tend to be popular at times when home prices are accelerating. As homes become less affordable, making a 20% down payment of cash might be difficult for an individual. Piggyback mortgages allow buyers to borrow more money than their down payment might suggest.

The first mortgage of an 80-10-10 mortgage is usually always a fixed-rate mortgage. The second mortgage is usually an adjustable-rate mortgage, such as a home equity loan or home equity line of credit (HELOC).

Benefits of an 80-10-10 Mortgage

The second mortgage functions like a credit card, but with a lower interest rate since the equity in the home will back it. As such, it only incurs interest when you use it. This means that you can pay off the home equity loan or HELOC in full or in part and eliminate interest payments on those funds. Moreover, once settled, the HELOC remains. This credit line can act as an emergency pool for other expenses, such as home renovations or even education.

An 80-10-10 loan is a good option for people who are trying to buy a home but have not yet sold their existing home. In that scenario, they would use the HELOC to cover a portion of the down payment on the new home. They would pay off the HELOC when the old home sells.

HELOC interest rates are higher than those for conventional mortgages, which will somewhat offset the savings gained by having an 80% mortgage. If you intend to pay off the HELOC within a few years, this may not be a problem.

When home prices are rising, your equity will increase along with your home’s value. But in a housing market downturn, you could be left dangerously underwater with a home that’s worth less than you owe.

Example of an 80-10-10 Mortgage

The Doe family wants to purchase a home for $300,000, and they have a down payment of $30,000, which is 10% of the total home’s value. With a conventional 90% mortgage, they will need to pay PMI on top of the monthly mortgage payments. Also, a 90% mortgage will generally carry a higher interest rate. 

Instead, the Doe family can take out an 80% mortgage for $240,000, possibly at a lower interest rate, and avoid the need for PMI. At the same time, they would take out a second 10% mortgage of $30,000. This most likely would be a HELOC. The down payment will still be 10%, but the family will avoid PMI costs, get a better interest rate, and thus have lower monthly payments.

What Is an Asset-Backed Commercial Paper (ABCP)?

An asset-backed commercial paper (ABCP) is a short-term investment vehicle with a maturity date that is typically between 90 and 270 days. A bank or other financial institution typically issues the security itself. The notes are backed by the company’s physical assets such as trade receivables. Companies will use an asset-backed commercial paper to fund short-term financing needs.

Understanding Asset-Backed Commercial Paper (ABCP)

Asset-backed commercial paper (ABCP) is a short-term money-market security that is issued by a special purpose vehicle (SPV) or conduit, which is set up by a sponsoring financial institution. The maturity date of an ABCP is set at no more than 270 days and issued either on an interest-bearing or discount basis.

The note is backed by the corporation’s collateral, which might include future payments to be made on credit cards, auto loans, student loans, and collateralized debt obligations (CDOs). These expected payments are collectively known as receivables. The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions.

Commercial Paper (CP) vs. Asset-Backed Commercial Paper (ABCP)

The primary difference between commercial paper (CP) and asset-backed commercial paper (ABCP) is that commercial paper is not backed by assets. Commercial paper (CP) is a money market security issued by large corporations to raise money to meet short-term obligations. With a fixed maturity of less than one year, the commercial paper acts as a promissory note that is backed only by the high credit rating of the issuing company.

Investors purchase the commercial paper at a discount to face value and are repaid the full face value of the security at maturity. Since standard commercial papers are not backed by collateral, only firms with excellent credit ratings from a recognized credit rating agency will be able to sell commercial papers at a reasonable price. A type of commercial paper that is backed by other financial assets is called an asset-backed commercial paper.

A company or bank looking to enhance liquidity may sell receivables to an SPV or other conduits, which, in turn, will issue them to its investors as asset-backed commercial paper. The ABCP is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the conduit, which is responsible for disbursing the funds generated by the receivables to the ABCP noteholders.

ABCP Interest Payments

During the life of the investment, the sponsoring financial institution that set up the conduit is responsible for monitoring developments that could affect the performance and credit quality of the assets in the SPV. The sponsor ensures that ABCP investors receive their interest payments and principal repayments when the security matures.

The interest payments made to ABCP investors originate from the pool of assets backing the security, e.g., monthly car loan payments. When the collateralized paper matures, the investor receives a principal payment that is funded either from the collection of the credit’s assets, from the issuance of new ABCP, or by accessing the credit’s liquidity facility.

Special Considerations

While most ABCP programs issue commercial paper as their primary liability, funding sources have been extensively diversified lately to include other types of debt. This includes medium-term notes (MTNs), extendible commercial paper, and subordinated debt to provide credit enhancement.

One significant concern about ABCPs and related investments stems from the possibility of liquidity risk. If the market value of the underlying assets decreases, then the safety and value of the ABCP might also suffer.

It’s important for ABCP investors to understand the composition of the underlying assets and how the value of those assets might be impacted by market stresses, such as a downturn in the economy. The inability in some circumstances for investors to sell their investments quickly to minimize losses is just one of the risks associated with asset-backed commercial paper.

What Is Accrued Income?

Accrued income is the money a company has earned in the ordinary course of business but has yet to be received, and for which the invoice is yet to be billed to the customer.

Mutual funds or other pooled assets that accumulate income over a period of time—but only pay shareholders once a year—are, by definition, accruing their income. Individual companies can also generate income without actually receiving it, which is the basis of the accrual accounting system.

Understanding Accrued Income

Most companies use accrual accounting. It is an alternative to the cash accounting method and is necessary for companies that sell products or provide services to customers on credit. Under the U.S. generally accepted accounting principles (GAAP), accrual accounting is based on the revenue recognition principle. This principle seeks to match revenues to the period in which they were earned, rather than the period in which cash is received.

In other words, just because money has not yet been received, it does not mean that revenue has not been earned.

The matching principle also requires that revenue be recognized in the same period as the expenses that were incurred in earning that revenue. Also referred to as accrued revenue, accrued income is often used in the service industry or in cases in which customers are charged an hourly rate for work that has been completed but will be billed in a future accounting period. Accrued income is listed in the asset section of the balance sheet because it represents a future benefit to the company in the form of a future cash payout.

In 2014, the Financial Accounting Standards Board, which establishes regulations for U.S. businesses and non-profits, introduced “Accounting Standards Code Topic 606 Revenue from Contracts with Customers” to provide an industry-neutral revenue recognition model to increase financial statement comparability across companies and industries. Public companies were required to apply the new revenue recognition rules beginning in Q1 2018. The FASB also issued the following amendments to ASU No. 2014-09 to provide clarification on the guidance:

-ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date

-ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)

-ASU No. 2016-10, Revenue from Contracts with Customers(Topic 606) – Identifying Performance Obligations and Licensing

-ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients 

Examples of Accrued Income

Assume Company A picks up trash for local communities and bills its customers $300 at the end of every six-month cycle. Even though Company A does not receive payment for six months, the company still records a $50 debit to accrued income and a $50 credit to revenue each month. The bill has not been sent out, but the work has been performed, and therefore expenses have already been incurred and revenue earned.

When cash is received for the service at the end of six months, a $300 credit in the amount of the full payment is made to accrued income, and a $300 debit is made to cash. The balance in accrued income returns to zero for that customer.

Accrued income also applies to individuals and their paychecks. The income that a worker earns usually accrues over a period of time. For example, many salaried employees are paid by their company every two weeks; they do not get paid at the end of each workday. At the end of the pay cycle, the employee is paid and the accrued amount returns to zero. If they leave the company, they still have pay that has been earned but has not yet been disbursed.